You've been thinking about buying your own home for quite a long time, and now you're ready to take the plunge. You've been saving money for a down payment, and you know the next step is preparing to apply for a mortgage.
But where do you start?
Here are the top 5 things you need to know before approaching a mortgage lender.
1. Understand Your Options
All mortgages are not created equal. There are several different types, which vary based on interest rates and payment terms.
o With a fixed-rate mortgage, your monthly payments remain the same during the entire length of the mortgage. There will be no variations in monthly payments, regardless of changes in interest rates and inflation.
o With an adjustable-rate mortgage, you will often receive a lower initial interest rate, but your monthly payment amount can rise and fall as interest rates fluctuate (within certain caps or limits).
o With a balloon or reset mortgage, you once again may be offered a low interest rate, but it will hold for a limited time. After that, the balance of the mortgage will be due, or you will need to refinance.
2. Become a Rate Watcher
The state of the economy influences interest rates, which ebb and flow on a regular basis.
Your daily newspaper tracks these rates, so stay current by watching whether rates are rising, falling or remaining stable.
It behooves you to become as educated as possible about how these rates will affect your mortgage – and to see if you want to postpone applying for one until rates drop.
3. Get Pre-Approved
Consideration getting pre-approved for a mortgage, says Frank Nothaft, PhD, vice president and chief economist for Freddie Mac, the stockholder-owned corporation established by the United States Congress in 1970 to create a continuous flow of funds to mortgage lenders in support of homeownership and rental housing.
"A benefit of being pre-approved for a mortgage loan is that it gives the prospective homebuyer additional bargaining leverage when competing with other prospective buyers for a home," he says. "A home seller may be more likely to accept an offer from a pre-approved borrower – because the seller knows the buyer can get a loan – than another bidder, who may be exactly the same in financial qualifications and offer, except that he lacks the pre-approval. "
4. Consider Making a Higher Down Payment
Making a higher down payment on a home will reduce your mortgage, but there are definite pros and cons, according to Dr. Nothaft.
"The pro of putting down more money is that you can often obtain lower-cost financing," he says. "High down payment loans – that is, low loan-to-value ratio – represent less default risk to a lender, and are safer.
"The con," he continues, "is that it may result in the borrower having to delay a home purchase, because the borrower does not have enough liquid assets to make a larger down payment. -time home buyers, who typically do not have the financial wherewithal to make a large down payment. "
5. Select Your Lender Carefully
As in any industry, there are "bad apples" who ruin the reputations of respectable professionals. In the mortgage business, these individuals are known as "predatory lenders" – individuals who take advantage of vulnerable consumers. Those most sooner to becoming victims include the ill-informed, the elderly, women, minorities, low-income buyers and consumers with bad credit.
To avoid becoming "prey," select a lender with solid credentials. You can secure a referral from your bank or credit union, real estate agent, government housing agency, or friends and relatives who have successfully purchased homes.
Never trust a mortgage offer that arrives via email, as it is likely originated from a spammer.