How To Choose The Best Loan Type – Choose The Best Type of Mortgage
Finding the right property is only half the battle unless you can buy it entirely in cash. The other half is Choosing the best type of mortgage (how to choose the best loan type). You’ll most likely be repaying your mortgage over a long period of time, so it’s critical to find a loan that fits your needs and budget.
When you borrow money from a lender, you are entering into a legal agreement to repay that loan over a set period of time (albeit with interest).
Choose the type of loan that best meets your requirements
Things start moving very quickly once you find the right home to buy. When it comes to choosing a mortgage, there are numerous tradeoffs and options to consider. It’s best to consider those tradeoffs ahead of time when you have more time.
How To Choose The Best Loan Type: What to Do
Here is what to do when choosing the best type of loan or mortgage:
1. The first decision you must make is the type of loan.
If you’re unsure about which type of loan is best for you, refer back to our guide to the various types of loans.
The following are the primary loan options available to you:
- Fixed vs. adjustable interest rate
- Loan type (example, conventional, FHA, or VA)
- Loan term (example, 15-year or 30-year)
2. Next, decide whether you want to pay points or receive lender credits, or both
Lender credits are rebates from the lender that offset your closing costs. Points, also known as discount points, are one-time fees paid to your lender in exchange for a lower interest rate.
- Learn more about how points and credits work and how to choose the best option for you.
- If you want to look into a loan with points or credits, ask each lender to show you two options: one with points or credits and one without.
- Comparing two options side by side is the most effective way to determine which is the better deal.
- Compare how much cash you’ll need at closing, the monthly payment, and the interest you’ll pay over the life of your loan.
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How To Choose The Best Loan Type: What to know
See how to choose the best type of loan below:
1. The options you discuss with lenders are not binding contracts
Many lenders use worksheets or printouts that show a specific loan option to help you compare the pros and cons of different loan options. These worksheets are extremely helpful for thinking through your options before you have found a home or chosen a lender.
They are, however, not a firm offer. Request formal Loan Estimates from each lender you’re considering after you’ve found a home you want to buy.
2. Before requesting Loan Estimates, you should know what type of loan you want
A Loan Estimate is a standardized form that allows you to compare costs between lenders. Before requesting Loan Estimates, it’s a good idea to know what kind of loan you want. You’ll receive offers for the same type of loan from each lender, and you can compare them to see which is the best deal.
3. It is important to consider how long you intend to keep the loan
When comparing two potential loan options, consider the shortest and longest period of time you can see yourself keeping the loan. Whether you should pay closing costs upfront or use lender credits to reduce closing costs, for example, is determined by your timeframe.
In addition, while an adjustable-rate mortgage may have a lower monthly payment at first, it can be risky if you keep the loan after the initial interest rate expires.
- Determine the shortest, most likely, and longest period of time you expect to keep the loan.
- Request assistance from loan officers or a housing counselor in calculating the total costs of a loan over each of your three timeframes.
How to Avoid Drawbacks – How To Choose The Best Loan Type
To avoid pitfalls in choosing the best loan that suit you, follow the steps below:
1. Consider your options beyond the monthly payment
It is critical that you can afford the monthly payment for the loan amount and type that you are considering. However, you should also consider the amount of risk you are taking on (for example, with an adjustable-rate mortgage, your interest rate and monthly payment may rise later) as well as the overall cost of the loan.
Some loans may have a lower monthly payment but a higher overall cost. Consider which is more important to you.
2. Don’t count on being able to refinance
Mortgage borrowers can often benefit from refinancing. Refinancing, on the other hand, is never guaranteed. You may be unable to refinance if changes in the local economy reduce your income or home value. Furthermore, if interest rates rise in the future, refinancing may be pointless.
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What Is a Mortgage?
Your mortgage payment is made up of two parts: principal and interest. The loan amount is referred to as the principal. Interest is a fee charged by lenders for the privilege of borrowing money that you can repay over time (calculated as a percentage of the principal).
During the term of your mortgage, you pay in monthly installments based on an amortization schedule established by your lender.
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