Shopping for a home can be fun. You tour houses and imagine where you’ll entertain friends and family, happy times baking in the kitchen, and how you might redecorate the living room.
And although it may not be as exciting, you’ll also be shopping for a mortgage to make that home purchase possible. Rates remain near historic lows for 30-year fixed-rate and adjustable-rate loans. But with so many financial services firms offering products, the shopping process can be challenging.
Here are five ways you can plan the task and make the best decisions.
1. Check your credit score
Months before setting up your list of visits to open houses, see how your credit stacks up so you can take advantage of the best interest rates. Check your credit with all three rating agencies (you can do this for free once a year at AnnualCreditReport.com), and read the fine print. Make sure the credit cards listed are all yours and that the payments listed, especially late payments, are accurate. If not, follow up with the credit agency involved to straighten it out. This can take a month or two at minimum. Also, make sure your past addresses and employers are correct.
2. Choose your loan type
Before making an offer on a home, you’ll want to understand what type of loan you want, as there are many variations. For example, with a fixed-rate mortgage, you pay the same amount per month for the loan’s life, whereas with an adjustable-rate mortgage, the lender can change your payments based on the market interest rates.
The big concern with adjustable-rate mortgages is that rates can rise. You might want to pay points, an upfront fee that gives you a lower interest rate. Understand all the options, including differences based on term lengths (for example, you can choose to pay off your mortgage over 15 years instead of 30).
3. Get quotes from several lenders
Talk to friends about their experiences and who they used. If your friends say their mortgage closed on time, representatives stayed in touch and the paperwork was reasonable, that’s a good sign. Note that fees vary depending on the lender, even if mortgage terms are the same.
Those fees can include title insurance, document preparation fees, courier costs, attorney fees in some states and recording costs. Ask for a fee breakdown, and learn if the lender offers cash back at closing, which can cover some or all of these expenses. By comparing lenders, you’ll get a better idea of what works for you.
4. Get mortgage pre-approval
Make your home-buying process easier by getting pre-approved for a loan. Lenders determine what they’re willing to loan you based on your W2s, pay stubs, tax returns, bank statements and other documents. This is all information you’ll need when applying for a loan anyway, so it’s helpful to organize the paperwork first.
Including a copy of the loan pre-approval letter when you make an offer on a house shows the seller that a lender is willing to give you a certain mortgage amount, making you a more attractive buyer.
5. Understand all costs
While the mortgage has its own costs, there are other initial closing costs to remember, including the down payment, property insurance, homeowners insurance, possible homeowners association fees and private mortgage insurance if you’re putting less than 20% down. Don’t forget that homes require maintenance and that you may need to make additional home purchases when you move in.
Consider all these costs when determining the size of mortgage that you can afford and your down payment amount. Remember that lenders may approve you for more than you want, so make sure you are comfortable with your monthly payments.
Learn more about mortgage loans from Nationwide Bank.