How to Choose a Mortgage Lender

How to Choose a Mortgage Broker?. Before you start house hunting, you should know what size and type of mortgage you want and can afford. Thinking about mortgages early on in the process and getting either prequalified or preapproved for a mortgage will improve your house-hunting efficiency and ability to close the deal once you’ve found the house you want.

Table of Contents

Mortgage Size

There’s a big difference between the mortgage you can afford and the mortgage that’s right for you.

What size mortgage can you afford? Just because you can get approved for a mortgage doesn’t guarantee you can afford it. To decide whether you can afford a particular mortgage, evaluate your current financial situation and your worst-case future scenario. Consider your savings goals, job prospects, plans for children and aging parents, and so on. These factors determine how much risk you can take on and help you decide How to Choose a Mortgage Broker, for example, whether you should consider an adjustable-rate mortgage.
What size mortgage can you get? Unless you have a bankruptcy or bad credit history, lenders generally approve you for a mortgage with monthly payments that amount to no more than 33% of your monthly pre-tax income. So, if your pre-tax income is $6,000, you could get approved for a mortgage with a monthly payment of $2,000.

Discover key tips for Choose a Mortgage lender, comparing rates, assessing fees, and ensuring you make the best decision for your home loan.

Mortgage Term

The length of the mortgage’s term affects both the total cost and the size of the monthly payments.

Longer mortgages mean smaller monthly payments because you spread the cost over more time.
Shorter mortgage terms result in lower total costs: Because they generate less total interest over time, shorter-term mortgages offer lower total costs than longer-term mortgages.

Which term should you choose?

Choosing a longer or shorter mortgage depends on what works best for your money situation. If you can handle the higher monthly payments of a shorter-term mortgage, that’s probably the better way to go. A longer-term mortgage is the better choice if you can’t (and many people can’t).

APR

The many “percentage rates” lenders give you for mortgages can be confusing and hard to understand. For instance, a lender might advertise a 6.9% interest rate that looks great next to a 7.1% rate from another lender but has hidden costs that make the rate much higher. To avoid all this confusion, pay attention to the annual percentage rate (APR) when comparing two mortgages.
The APR (Annual Percentage Rate) includes all costs in one number. For example, if one 30-year loan has an APR of 6.9% and another has 7.1%, the one with 6.9% is cheaper overall.

Fixed-Rate vs. Adjustable-Rate Mortgages

The most important factor in deciding whether to get an ARM or a fixed-rate mortgage is how long you plan to live in the property.

A fixed-rate mortgage is usually the better choice if you plan to stay put for a long time (more than 5–7 years).
If you plan to move on relatively quickly (within 5–7 years), an ARM can provide excellent value due to its lower initial rate. You can sell your home anytime during the fixed-rate period to avoid paying higher rates later when the rate changes.
Though the low monthly payments of adjustable-rate mortgages and interest-only loans are enticing, you should approach them cautiously. Many people choose ARMs and interest-only loans over fixed-rate mortgages to take advantage of the lower initial fees and “reach” for a house they wouldn’t ordinarily be able to afford. This tactic is a dangerous financial risk because a rate shift can lead to much higher monthly payments and, in the most dire cases, foreclosure. Never use an ARM to “reach” for a house you can’t afford

If You Choose a Fixed-Rate Mortgage.

As you would comparison shop for any other product, you should shop for the best mortgage. When choosing a fixed-rate mortgage, pick one with the length you want and the lowest APR.

If You Choose an ARM

ARMs are a bit more complicated than fixed-rate mortgages. The index and margin decide how the loan’s rate will change after the fixed-rate period ends. The interest rate for an ARM is calculated by adding the index and margin together.

Index: The interest rate for an ARM is based on one of several reference indexes (such as the interest rate of U.S. Treasury bills). When the interest rate of the index that an ARM is based on goes up or down, the ARM’s interest rate will change in the same way.. When shopping for an ARM, comparing rates based on the same index is best.
Margin: The margin is the extra amount the lender adds to the index’s interest rate. Most lenders add 2–4%. So, if the index is 5%, your mortgage rate would probably be between 7–9%. Always choose an ARM with the lowest margin.

Get Our Latest News First

How to Get a Loan Without Private Mortgage Insurance (PMI): Private Mortgage Insurance (PMI) is an extra monthly fee most lenders require if the down payment on a home is less than 20 percent
How to Get Private Mortgage Insurance : Private mortgage insurance (PMI) is generally required for borrowers who make a down payment of less than 20 percent.

How to Choose a Mortgage Broker