Financial Loan Advice: What Are The Best Mortgage Terms?

Determine which mortgage terms best suit your unique financial situation.

Securing a mortgage is likely to be your largest financial undertaking this year. A clear understanding of the various terms of your mortgage is critical to getting the mortgage that best meets your needs.

Loan Size

Often the least flexible term of your mortgage will be its size. As a result, it pays to talk to a mortgage broker before you go house-hunting. He or she will be able to give you an opinion on the maximum loan you will be able to take out, based on such items as your income, savings, and credit score. In order to maximize your attractiveness to sellers, you may want to obtain a "pre-approval" letter from your mortgage broker which will state the approximate maximum loan size you are qualified for.

Maturity

Maturity is much more a matter of personal preference than loan size. Standard US mortgages have a maturity of thirty years. Shorter maturities are more appropriate for those who can afford the slightly higher payments and want to avoid paying excess interest. Shorter maturities may also be a part of a plan to enter retirement debt-free. All lenders and brokers have mortgage plans to suit your maturity needs: just let them know your preference.

Fixed Rate or Variable Rate

One of the most important decisions you will make about your mortgage is whether you'd like a fixed rate or a variable rate mortgage. A fixed-rate mortgage will have the same exact monthly payment over the entire life of the loan, no matter what happens to interest rates. A variable-rate mortgage will have payments that vary - they may go up or down - over the life of the loan. Usually variable-rate loans start out at lower interest rates than fixed-rate loans.

A good rule of thumb is that if you plan to stay in the house for fewer than five years, a variable-rate mortgage is the cheapest option, and will not compromise your safety. Just be sure to check that your prepayment penalty (see below) will allow you to prepay your loan without incurring large fees. On the other hand, if you plan to stay in your house for longer than five years, you should choose the security of a fixed-rate plan.

Interest Rate

Your interest rate is the price of your loan. Your job history, income, savings, down payment size, credit history, and other mortgage terms will each factor into your interest rate. There is little you can do to control these factors other than listen to your mortgage broker about which terms may be costing you a significant additional amount of interest (such as a very small down payment). The one factor you can control is the extent to which you shop around. Mortgages are a commission business, and almost all interest rates are negotiable. By checking in with a few lenders you will be sure you're getting a fair deal on your interest rate.



Prepayment Penalties

A prepayment penalty is a penalty assessed if you buy your home or refinance your mortgage within a certain number of years of taking it out. If you're sure you'll be staying in this house for the rest of your life, you can skip this point. But if you may move in the next few years, you will probably want to find a loan with no prepayment penalty, or with a short-term (one or two year) prepayment penalty.

Fees (Points)

Fees are assessed by your broker and your lender for underwriting your mortgage. They are usually assessed as "points," with one point being equal to 1% of your loan amount. The smaller or more complicated your deal, the greater the number of points you will be charged.

"Front end" points are charged at the time of the loan, and will almost always be disclosed to you if you ask. "Back-end" points are charged to you by raising your interest rate for the life of your loan. Back-end points may or may not be disclosed to you, depending on the state you live in, but it never hurts to ask. If cash is tight at the time of your loan, you will probably prefer to pay back-end points.

Mortgage Insurance

You may be forced to pay mortgage insurance if your down payment is small, or if there are unsavory bits in your income or credit history. To you, the home buyer, mortgage insurance basically increases your monthly payments. If you can avoid it, do so. Your mortgage broker or lender will be able to advise you on your unique situation.

Debt Consolidation

If you ask, your lender or broker may be able to roll a portion of your outstanding credit card debt into your loan. Of course, this will increase your mortgage size and your monthly payments, so if you're already buying a pretty big house it may not be possible. But if it is possible, then rolling your credit card debt into your house makes a lot of sense. You may be able to save over 10% in interest on your debt. Be sure to ask your broker or lender if consolidation is an option, because some might not mention it on their own.

Cash Back

Cash back is becoming a more frequent feature of mortgages. But remember that cash back does increase your loan size, and frequently will add incrementally to your broker's fees. Even though cash back may be at a lower rate than your credit card debt, it is best to think of it in the same category - cash back is borrowed money. Only take cash back if you plan to immediately put the money to good use, for example, on home improvements. If you just want to spend your cash back as "fun money," you may want to rethink your budget.

Conclusion: Getting the Best Terms

The first part of getting a good mortgage is deciding what terms fit your needs best. If you are looking for a debt-free retirement, the biggest house possible, or a certain amount of cash back, then these factors will influence which mortgage terms are best for you. Lay out your goals, and then decide which terms mean the most to you.

The second and harder part of getting a good mortgage is shopping around. You can certainly drop by your local bank and pick up a prepackaged loan. But you will be able to improve almost any term of your mortgage just by asking a few different people about your options. Besides, a good broker or banker will not only find you the mortgage that best meets your needs, but will also be a good real estate resource for learning more. A good rule of thumb is to discuss your needs with at least two mortgage brokers before deciding on a mortgage. Best of luck!

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