Choosing a mortgage loan is not as easy as simply finding the lowest interest rate. There are many other factors that will determine which mortgage is right for you. Your financial picture, including your income, savings, cash reserves, and debt-to-cash ratio will determine how much you can afford to pay in monthly mortgage payments. Finding the “best” mortgage means balancing your mortgage options with your financial situation and your housing needs, now and in the future.
Since even the shortest mortgages typically last at least 15 years, you will need to project how your financial situation and your housing needs may change over the life of the mortgage. How long do you intend to live in the house? Do you anticipate significant expenses in the near future, such as college tuition costs? Are you starting a business that may require significant funding? Do you expect your income to increase over time, which may allow you to pay more toward your mortgage each month? Planning for these eventualities will help you determine how much you can afford to allocate toward your mortgage.
Next you will need to consider the level of risk you feel comfortable taking. Different types of loans carry different levels of risk. For example, an adjustable rate mortgage is more risky because the interest rate will change, while a fixed-rate loan offers more stability because of the locked-in rate.
Determining the life of your loan — 15, 20, or 30 years — and selecting a fixed or adjustable interest rate will typically be decisions that you will make. You will be able to pay off a shorter-term loan more quickly, but your monthly payments will be higher. Long-term fixed-rate loans are popular because they offer certainty, and many people find that they are easier to fit into their budget. But the prospect of taking 30 years to pay off a loan can be daunting.
You will need to give serious thought to all these factors, plus closing costs, in addition to looking for the lowest interest rate. The key to mortgage shopping is to find a loan that fits comfortably into your entire financial situation.
Of course, not all of these decisions will be in your hands. First you will need to get a lender to approve your application. Depending on your credit rating and other factors, they will offer you loans that they feel are within their level of risk — loans they believe you will able to repay. The lender will adjust interest rates, points, and other factors in accordance with the level of risk they believe you pose. From there you will need to choose a loan that fits you financially and personally.
Read “Finding the Best Mortgage Loan Rate” for more resources.