First time home buyers can easily be overwhelmed by the choices of mortgages available, the unfamiliar terms used, and the factors that are under consideration by the mortgage company which can significantly impact the terms of their mortgage. It is important to secure the best financing available when purchasing a home, because it is probably the largest single type of purchase most people will ever make, and the interest and fees will often double or triple (or more!) the amount that must be repaid.
The first thing a potential home buyer should do is to honestly evaluate their credit history. Hopefully they have been responsible in the debt accumulation and repayment because credit scores are one of the most important factors affecting the availability of better mortgage terms. It might be necessary to postpone home ownership until the credit history can be improved, or alternatively, to expect to refinance within a short period after repairing the credit history.
The second major consideration will probably be whether to consider a fixed or an adjustable rate mortgage. Fixed rate mortgages are sold at a particular interest rate which will never change for the life of the mortgage. Adjustable rates will of course vary over time, based on several factors. The best choice depends on the individual’s situation, especially the current interest rate (and projected rates) and how long the purchaser intends to own the mortgage. If rates are currently high, and expected to drop, it can be better to purchase an adjustable rate and then refinance to a fixed rate when the interest rate drops. However, if the rate does not perform as expected, the costs for the purchaser can be higher than anticipated. An adjustable rate may also be favorable if the purchaser does not intend to own the mortgage for a long period, for example if they know they will be transferred in two years. Always consider the points to be paid, the interest rate, and any associated fees (as well as penalties for early repayment) when deciding between mortgages. It is well worth your time to become well-informed in order to make the best decision as effect upon overall repayment can be enormous.
Another major consideration is the repayment term. Interest rates are generally lower for shorter term loans, and when added to the fact that less time is involved, the effect on repayment totals (and thus the savings) is substantial. However, the monthly payments will be higher, and the consumer must make sure they will be able to afford the higher payments to avoid going into default or being forced to refinance (especially when a forced refinance often occurs after a period of struggling, which usually involves late payments that damage the credit rating and thus drive up rates for refinance). If the consumer is unsure of being able to afford the higher monthly payment, it is always possible to initiate a longer term loan (which of course will then incur a higher interest rate) but request a copy of an alternate payment schedule that will allow repayment within a shorter term. Payments can be made according to that schedule as much as possible, allowing the loan to be repaid sooner and allowing at least some of the savings that would have resulted from a shorter term without resulting in foreclosure if the consumer is faced with unexpected circumstances or for other reason is unable to repay at an accelerated rate.
These are just a few of the factors involved in mortgage selection, and the most basic ones. We will cover other types of mortgages and other alternatives in later posts.