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3 Essentials to Smart Mortgage Decisions

July 31st, 2020

Maybe you’re thinking about buying a home but feel intimidated by the mortgage application process. It can feel overwhelming if it’s your first home purchase and you don’t know where to begin or who to talk to. If you think ahead, organize your finances, and do your research, you’ll be better prepared to make the best mortgage decision for you. Getting a mortgage (and buying a home) is not something anyone does lightly, so you want to make sure you’re as educated and prepared as possible!

Here are 3 major tips to help you prepare your finances and set yourself up for mortgage success.

1. Mortgage options - compare different loan options

When it comes to getting a mortgage, you’ve probably heard of the different types of loans like conventional versus FHA, or a fixed-rate versus an adjustable rate mortgage. Well, they all have different parameters, requirements, and stipulations. A lender will help you decide which mortgage type is best for you, but it’s always good to come into the conversation with some preexisting knowledge so you ultimately feel confident in your decision. Shopping, comparing, and negotiating may save you thousands of dollars!

When looking at various loan options, consider the following:

• Ask about all involved costs and fees. From the down payment, to origination fees, and closing costs, there is quite a bit involved in a mortgage and you don’t want to be surprised when things come up. Ask for a fee estimate breakdown of what each fee includes. Don’t be afraid to ask questions about something you don’t understand!
• Rates. Ask the lender what the various interest rate options are for the different types of loans. Remember, a lower interest rate could mean that you have to purchase PMI (private mortgage insurance) or make a larger down payment. Ask your lender for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.
• Points. Points are fees paid to the lender that buyers can purchase. Generally, the more points you pay, the lower your rate. Look for or ask about special offers on points in your area. Ask for points to be quoted as a dollar amount vs number of points.
• Down payment. Ask your lender how big of a down payment is required, and what your options are if you go with less than 20% (which is totally possible!). If PMI is involved, ask what the total cost of insurance will be and how it will affect your monthly payments.
• Remember, it’s ok to negotiate. You want to get the best deal you can, so ask for what you think is fair and the lender will work with you on an appropriate price.

2. Total cost analysis - consider the total cost over time

You know your financial picture and what you’re prepared to put towards a mortgage payment each month. If you’re currently renting, you could end up paying less on a mortgage payment (depending on where you live). Remember that owning a home includes other costs in addition to the mortgage payment alone, like HOA fees or PMI that will ultimately increase your monthly cost. So being realistic about what you can afford now and what you think your financial picture is going to look like in the next five years is going to be important in estimating the total cost of your new home.

Use our Mortgage Calculator to calculate your monthly costs and see how it will look over time. You can modify the input fields to change the loan amount, down payment amount, loan length, and other factors to play around with different options and scenarios.

3. Financial strategies to reduce debt - analyze prepayment and diverse investment strategies

Getting a mortgage is adding to your debt, but at the end of your loan period, you’ll have something of your own and a great financial investment! Paying rent isn’t debt, but that money doesn’t lead to equity. But you want to make sure that you’re not accruing too much additional debt with your new mortgage. You just worked so hard getting your finances in order to get your mortgage, keep it nice and under control! Here are some strategies to stay debt free:

• Don’t create more debt (getting into credit card debt, taking out loans that you can’t pay off, etc.). This won’t help you get out of any existing debt, but it won’t add to it either and will make paying off any existing debt that much easier.
• Make larger monthly payments - if you pay the minimum payment towards your debt each month, it will take longer to pay off and you’ll accrue more interest. Try making larger payments when you can.
• Create and stick to a budget - analyze your finances and see where you can cut back and reallocate funds to put towards an emergency fund or mortgage payment. Emergency funds are great for just that, and so you don’t have to use your credit card and add to your debt!

If you follow these steps and approach getting a mortgage strategically, you’ll come out on top (probably saving money and confident and happy with your homebuying experience). Talk to a lender or financial advisor as you prepare to apply for a mortgage and make sure you’re doing all the right things to create a strong financial profile for yourself. If you have questions about specific mortgage products, qualifications, or anything mortgage-related, email us and we’ll be happy to chat with you!