How to Compare Loans and Mortgages
Shopping for a loan offers multiple options to choose from. Making this choice can feel complicated because there are so many terms and factors for each loan, not to mention the reputation of the lender to consider. As you compare loans and mortgages, always keep in mind:
- The length of the loan.
- The annual percentage rate (APR).
- Total amount owed.
- Balloon payments.
- Monthly payments.
- The reputation of the company offering the loan.
Before you apply for a new mortgage loan, understand you have choices in the matter. You can shop around to find the best options and there are many websites – including landing pages on a bank’s own site – that can help you do this.
Often to get the specific terms for a loan, you will have to start the application process and be at least preapproved. Remember that researching a loan and even being preapproved does not commit you to that loan. You are in control of which loan you choose, and that should be the best one for your purposes. Find the best loan includes many aspects.
The Length of the Loan
The best loan deals are almost always the loans that have the shortest terms. The fifteen year mortgage will almost certainly increase the monthly payment, but paying a mortgage in fifteen years instead of thirty means you will be paying far less over the life of the loan, building equity in your home and paying off the loan completely in half the time of a conventional mortgage. Provided you don’t have a prepayment penalty, you can also increase your monthly payments on a longer term loan and pay off the loan more quickly.
Annual Percentage Rate
The annual percentage rate or APR is the adjusted interest rate you’ll be paying over the life of the loan. While 5 and 6 percent may not seem that different, that one percentage point can make a huge difference in how much you’ll be paying every month in interest and especially how much you’ll pay over the life of the loan.
The APR is how much it costs you to borrow the money once you’ve factored in the interest rate, origination fees and points paid at closing. A fixed rate loan will have the same APR for the life of the loan. A variable rate loan, on the other hand, will have a shifting APR which will affect the monthly payments you’ll be required to make.
Total Amount Owed
This is a number that if often brushed under the rug a bit in loan discussions, but it is more important than monthly payments in many ways. The total amount owed is how much money you’ll be paying for your new home. The buying price of your home may be $200,000, but once you add in the APR, fees and points you may be paying closer to $400,000, or double the home price, to borrow the money to pay for the house. The loan with the smallest total is considered the best, but be sure you can afford the monthly payments.
A balloon payment is a large payment that is due at the end of a loan. A loan that includes a balloon payment may have very low monthly payments for the first five or ten years, but then the bulk of the money will be due in a single payment. You will either need to make the balloon payment or refinance the loan to afford to keep your home.
One of the last financial considerations for a mortgage loan is how much you’ll wind up paying each month. Many people start by looking at monthly payments, but the payment is certainly not the whole story. A low monthly payment might be hiding balloon payments, rising APRs or extremely high total out of pocket costs. Consider a less expensive home as you start the process of comparing mortgages so that you have more options for loans that fit in your budget but offer you the best deal overall.
A final thought while you shop for loans and mortgages is the reputation of the lender. Looking at numbers is extremely important to find the best loan, but if the best offers are from a bank that current customers dislike, that may be a red flag for you. Mortgages are often bundled and sold to other banks with less favorable terms.
Reading reviews and actively looking for complaints about mortgage lenders may give you some insight into companies with bad reputations for customer service. While only you can be the judge of how much value there is in a bank that treats customers well and is above board, may find the lender’s reputation with customers to be a major consideration in the loan they ultimately select.
Getting Approved: 5 Tips for Getting a Mortgage
Often the hardest part of shopping for a mortgage is getting approved for the loan you want. When compared to car loans and personal lines of credit, mortgages are tremendous loans, and companies providing these loans will carefully consider your ability to repay the loan. The better you look as a borrower, the better loan terms will likely look.
In order to be approved quickly and easily for a mortgage, you’ll want to keep a few tips in mind.
You may not need a down payment
Conventional loans often require 20 percent down, which makes a lot of would-be homeowners wait for years before applying. But not all loans require a large down payment and some don’t require any down payment at all.
- A VA loan or mortgage is guaranteed by the Department of Veterans Affairs. To qualify for a VA loan, you must be a veteran, an active-duty service member or certain borrowers in the National Guard and reserves.
- If you are shopping in a rural area, the U.S. Department of Agriculture guarantees zero-down mortgages as part of the Rural Development program. These are available only in certain areas.
- The Navy Federal Credit Union provides mortgages with no down payment for qualified members.
- The Federal Housing Administration, FHA, require much smaller down payments, some as low as 3.5 percent of the loan total.
- Some private lenders offer conventional mortgages with percentages as low as 3 percent provided you also arrange private mortgage insurance.
Perfect credit helps, but isn’t required
If you have excellent credit, generally a credit score higher than 720, you have many options for mortgages and you can expect favorable terms and a smooth application and acceptance process. But there are many lenders who do not have perfect credit scores.
These borrowers can still be approved for mortgages, especially if they opt for a FHA loan. The average credit score for a FHA borrower is 686 compared to the conventional borrower’s average score of 753. FHA loans are available for those with credit scores as low as 500, but a score of 580 will make the process much easier.
Save more than you need
If you are saving up 20 percent for your new home, go ahead and bump that savings up a bit. Mortgage companies like borrowers who have extra funds in reserve. If you’re going to deplete your bank account to pay for the down payment, you will have nothing in reserve for emergencies and the necessary costs of home ownership.
Banks may offer you a loan with a lower down-payment to keep some of your reserves intact, but look for expensive private mortgage insurance on these loans. It is often easier to save a bit more or buy a bit less house to leave some reserve funds in your bank account.
Borrow less than you can afford
Stretching to make mortgage payments will make you miserable over time, especially if your income doesn’t rise as quickly as you think it might. The idea of paying so much for your home that you are left without cash for other activities or payments is called being “house poor.” As you are shopping for homes and mortgages, borrow far less than you can “afford” to do so.
Often the bank’s preapproval amounts require stretching your budget, but it is better to keep your home price roughly twice the amount of your take home income. If you make $80,000 per year, look for a home and corresponding mortgage less than $160,000.
Keep your finances steady
A new home is exciting, but avoid the temptation to take out new small loans for appliances, furniture and other home items while the mortgage paperwork is being processed and underwritten. Mortgage lenders want your finances as steady as possible during the home buying process.
This means holding off on the special no-interest financing for a new washer and dryer to avoid dinging your credit with a new application and loan amount. You will also have to hold off making large purchases on your credit cards or taking out new car loans as well. Your credit should look the same or better during the month or two of underwriting and approval. This can be frustrating, but worth it when you close on a new mortgage easily.
Explained: 3 Differences in Mortgage Types
There are many different types of mortgage loans available with different terms and rates. Understanding the types of loans available should help you guide your search for the best mortgage.
Differences in Loan Rates
There are two primary distinctions in terms of annual percentage rates on mortgage loans – fixed or variable.
- Fixed rates keep the same interest rate for the entire loan. A thirty year loan at 6 percent will keep the same monthly payment every month for the full life of the loan.
- Variable rates are used in adjustable-rate loans. These loans will adjust the APR or percentage of interest paid on the loan periodically. Typically, an adjustable rate loan will stay fixed for a set amount of time, perhaps five years, before the interest rate begins to adjust. Once the interest rate on a mortgage begins to change, monthly payments change as well.
Differences between Government and Conventional Loans
The government offers specific types of loans and mortgages in addition to the standard, or conventional, mortgages offered by traditional banks. Government loans are backed by the government in some way and are often available only to those who meet certain criteria. The conventional home loan is more widely available, but is not backed by the government. There are three common types of government-backed loans.
- FHA Loans are overseen by the Federal Housing Administration and the Department of Housing and Urban Development, or HUD. FHA loans are available to all types of borrowers and require a down payment as low as 3.5 percent. The loans do require mortgage insurance, which will increase the amount of monthly payments.
- VA Loans are offered by the U.S. Department of Veterans Affairs. These loans are only available to military service members and families. VA loans do not require a down payment or mortgage insurance, allowing veterans to borrow 100 percent of the financing needed for a new home.
- The United States Department of Agriculture, or USDA, offers rural borrowers in a certain income bracket options for loans as well. The Rural Housing Services backs a mortgage loan available for rural residents with a steady, low or modest income who are unable to take on a conventional mortgage loan.
Differences in Loan Size
The amount of money you are borrowing will determine if you are taking on a jumbo or a conforming loan.
- A conforming loan is simply a loan that is less than the limits set by Fannie Mae or Freddie Mac, the government-controlled corporations that deal in mortgage-backed securities. A conforming loan is for less than the underwriting limits set by the corporations.
- A jumbo loan is a mortgage with an amount higher than the preset limits established by Fannie Mae and Freddie Mac. It doesn’t “conform” to the standards and is often for a very large amount. These loans therefore are considered riskier and may require larger down payments and exceptional credit.