When evaluating mortgage options, many homebuyers assume that the best offer is always the one with the lowest rate. Which raises the question – is that truly the case? And if not, what other factors should be considered alongside that interest rate?
Today, we’ll go over the important factors to consider in your mortgage. By considering these factors, you'll be better equipped to evaluate mortgage offers and choose the one that best fits your financial situation and homebuying goals.
Financial Factors
Perhaps the easiest pieces of a mortgage to consider are those that pertain directly to finances. And the main piece of this that will make the biggest impact on the overall price you pay for your home is your interest rate.
Interest rates
When searching for a mortgage, it is important to be knowledgeable of current mortgage rates, based on your credit score. The higher your credit score, the lower a rate you will be eligible for, and vice versa. Every percentage point makes a difference in the cost of your monthly payments over the life of the loan – meaning in many cases that a lower mortgage rate is the best you can do – but this is not the end-all, be-all. It is important to consider other factors beyond the interest rate to ensure not only are you receiving the best price, but the best overall mortgage experience.
Multiple rate types are available as well – fixed rate versus adjustable rate. With fixed rate loans, the rate you signed today is locked as long as your mortgage lasts (unless you choose to refinance). On the other hand, adjustable-rate mortgages start at today’s rate, and then after a designated period, adjust to the new market rate, either lower or higher. If you are looking for security and consistency or expect rates to increase in the future, a fixed rate mortgage is a good option. However, if you expect rates to decrease in the future, but are intent on purchasing now, an adjustable-rate mortgage may be best.
Closing Costs
Another key factor to consider is the closing costs associated with each offer. Closing costs encompass various fees and expenses that you will need to pay when finalizing your mortgage. These can include appraisal fees, title insurance, attorney fees, and other administrative costs. While a mortgage with a lower interest rate might seem like the best deal initially, high closing costs can offset the savings from a lower rate. It's essential to review any loan estimate document provided by lenders, which outlines the estimated closing costs. Comparing these costs across different mortgage offers can provide a clearer picture of the total cost of each loan, helping you make a more informed decision.
Loan terms and monthly payments
Loan terms are important to take into consideration given your budget, with some originators offering more flexibility than others. Common terms are 15, 20, and 30 years, with 30 being the most common. And while longer terms have lower monthly payments, they do cost more over the life of the loan – so it’s important to take into consideration how much you can afford to spend monthly on your mortgage. A common rule of thumb is to target 28% of gross monthly income as a mortgage payment.
It's also important to understand the differences and benefits of FHA vs. Conventional Loans. FHA loans may be more suitable for first-time buyers with lower credit scores or smaller down payments, while conventional loans might offer better terms for those with higher credit scores and larger down payments.
Prepayment penalties
Another piece of the mortgage to consider is if there are any prepayment penalties – penalties which are incurred when you pay off your mortgage sooner than the full term. When considering a mortgage, it’s best to find a mortgage that does not contain pre-payment penalties – allowing you to pay as much as you feel able to above your standard monthly payment, which will save you money on interest payments over the life of the loan.
Assistance programs
Oftentimes, different locations and different institutions have unique assistance programs available to qualified homebuyers. Whether this assistance be in the form of downpayment assistance grants, mortgage rate buydowns, or otherwise, it is important to do ample research into the programs you may be eligible for that can help ease your financial burden in the short and long-term.
Qualitative Factors
These factors, which are often harder to judge, can be just as crucial as their financial counterparts. Who you borrow from makes a difference, which makes it important to consider the impact of these less “set-in-stone” factors
Lender Reputation
Before signing on the dotted line, as with any large purchase, it is important to do your research. If going through a bank lender, it is important to do your research on not only the individual lender, but the company as well. Seek out reviews on google, Zillow, Facebook etc., where real customers have shared their experiences, positive and negative, with lenders. This will give you a clearer picture of the lender’s credibility, and a better idea of the level of service and professionalism you will receive.
Customer Service
In tandem with lender reputation, it is also important to gain a clear understanding of the customer service that will be available to you after your home purchase. Depending on the lender, some will take care of your questions and concerns directly, whereas others will outsource their customer service. Good communication can make a big difference, which makes select a lender or institution who will service your loan directly a key factor to consider.
Approval time
In a housing market with low inventory, a one-day delay can result on you missing out on the home of your dreams. As such, understanding how long the mortgage approval process takes, and picking one that best aligns with the speed the housing market is moving at, is a difference maker in ensuring you land the home you want without any snags in the process.
Minnwest Bank is here to help you grow
Minnwest Bank is here to empower you with knowledge to make informed decisions about your mortgage journey. Choose Minnwest Bank as your mortgage lender, and you’ll gain a team that’s always in your corner. We take time to get to know you, your family, and your financial goals, so we can provide the expert guidance to help you achieve your dream of owning a home. And through the life of the loan, help is always a phone call or visit away.
Learn more about our mortgage programs and reach out to a Mortgage Banker in your community today.
