Now that you know how much you want to spend on a home, you’re ready to start looking at homes and exploring your loan choices. Don’t wait until you find a home to start thinking about how to finance it. Take time now to explore your options and decide what kind of mortgage loan is right for you. You will be more confident and have fewer surprises down the road.
Understand the different kinds of loans available.
A 30-year fixed-rate loan is a good choice for many people, but it’s not the only kind of loan available. Depending on your circumstances and goals, you might also see if a different kind of loan might suit you better.
Your down payment amount affects your loan choices and your costs.
Many homebuyers choose to put less than 20 percent down. When you put less than 20 percent down, you will likely need to pay for mortgage insurance. Mortgage insurance adds to your loan costs, but it helps you get a loan you might otherwise be unable to get. Mortgage insurance protects the lender if you fall behind on your payments, which means lenders are more willing to lend to you. Mortgage insurance doesn’t protect you or pay your mortgage for you. There are multiple options for buyers with less than a 20% down payment. Some options may be cheaper than others depending on your specific circumstances, the local market in your area, and changing general market conditions. Ask your loan officer what they recommend and why.
- A Federal Housing Administration (FHA) loan.
- A conventional loan with private mortgage insurance or a “piggyback” second mortgage.
- For active duty servicemembers, veterans, or surviving spouses, a VA loan.
- For residents of small towns or rural areas, a USDA loan.
There may be local down payment assistance programs available to you.
Many local areas have down payment assistance grant funds available for first-time homebuyers with low and moderate incomes. Learn more about these kinds of programs. If you’re considering a local program, ask questions and find out whether there are any conditions you have to meet. For example, you may need to pay the money back if you don’t live in the home for a certain amount of time.
Learn about loan costs.
Choosing a loan isn’t just about the interest rate or the monthly payment. There are many costs associated with getting a mortgage. Take the time upfront to learn about these costs and your choices for paying for them. That way, you’ll be better prepared to make the right decision for you when the time comes.
Mortgages are complex, and getting a better deal on one part of the mortgage often means paying more elsewhere. For example, one mortgage may have a lower interest rate, but higher closing costs than another offer. Become familiar with the different categories of costs.
- If you want to lower your interest rate, you can pay points. Points, also known as discount points, are money you pay upfront to your lender in exchange for a lower interest rate. Points increase your closing costs.
- If you want to reduce your closing costs, you can ask to receive lender credits. Lender credits are money you receive from the lender to offset your closing costs. You agree to pay a higher interest rate in exchange for an upfront rebate that is applied to your closing costs.
- You can do neither. You pay all of your closing costs out-of-pocket up front, and get an unadjusted interest rate.
Get a prequalification letter.
A prequalification letter is a document from a lender stating that the lender is tentatively willing to lend to you, up to a certain loan amount. This document is based on certain assumptions and it is not a guaranteed loan offer. But, it lets the seller know that you are likely to be able to get financing. Sellers frequently require a prequalification letter before accepting your offer on a house.
Select the kind of loan that fits your needs.
Once you find the right home to buy, things start to move very fast. There are a lot of tradeoffs and choices to make when choosing a mortgage. It’s best to think through those tradeoffs in advance, while you have a bit more time.