How to Choose a Mortgage: What to Consider
Key Takeaways
- Choosing a mortgage involves comparing loan types, rates, terms, and costs.
- The right mortgage depends on your budget, long-term plans, and how different home loan options affect your payments and total costs.
- Looking at APR, fees, and total borrowing costs can help you better understand the true cost of a mortgage.
- Taking time to understand your options and loan details helps you make a more confident mortgage decision that supports your goals.
When you are buying a home with a mortgage, there are several factors you’ll want to know before applying, such as the interest rate, APR, loan type, fees, closing costs, and loan term. Each one is important for your decision, so you’ll want to learn as much as you can about them. Taking time to understand these factors can help you make a more confident mortgage decision.
1. Set Your Homebuying Budget
Before choosing a home loan, make sure you have established your affordable budget and have outlined what you can spend on a house. You’ll want to consider your monthly and long-term costs, such as homeowners insurance, property taxes, utilities, and home repairs.
You can use a mortgage payment calculator to get an idea of how much it may cost to own a home and what works best for your budget.
Pro Tip
Review your current credit score while house shopping. Your credit health and score can impact your approval and loan terms and could increase or decrease your costs.
2. Compare Home Loan Types You’re Eligible For
You’ll also need to understand what types of mortgages are available to you. You may not qualify for all these options, but it’s very likely that some can fit your needs.
● FHA loans: FHA mortgages make homeownership more affordable with flexible credit scores, and competitive rates and terms. These types of loans have low down payment requirements (3.5%). You can only use FHA loans to finance primary residences.
● VA loans: This is an excellent choice for qualifying Veterans and members of the military community. VA mortgages have competitive rates and terms, and when you are buying a home, you can make a 0% down payment. Similar to FHA loans, you can use VA loans solely to finance primary residences.
● Conventional loans: You can use conventional mortgages to finance a home, a vacation home, or an investment property. When you are buying a home with a conventional loan, putting at least 20% down allows you to avoid paying private mortgage insurance (PMI).
● USDA loans: Another type of loan you may qualify for is a USDA loan, but these loans require the home to be in an eligible rural or suburban area and meet specific qualifications. Also, you must use a USDA loan for a primary residence.
Adjustable vs. Fixed-Rate Mortgages
One of the other considerations when choosing a loan is whether you’ll go with an adjustable-rate mortgage (ARM) or a fixed-rate mortgage. Check out how each mortgage works below.
Understanding these options is important when choosing between an ARM and a fixed-rate mortgage. Your choice may depend on how long you intend to stay in the house and how comfortable you are with the risk of payment variation. Both types of mortgages may be used for cash out refinances, and it’s common for homeowners to refinance an ARM loan to a fixed-rate mortgage, or vice versa.
3. Look at Mortgage Rates and Costs
An interest rate is the cost you pay to borrow money, shown as a percentage. When you are choosing a mortgage, be sure to look at the mortgage rate versus the APR or "annual percentage rate." APR includes interest charges, points, and other fees you might have to pay. APR helps you understand the true cost of a mortgage.
When reviewing mortgage options, you’ll also need to look at your total borrowing costs because interest payments are not the only cost of financing a home. Different mortgages require different minimum down payments, which can impact the options available to you.
You may pay discount points (1 point equals 1% of the loan amount) when you get a mortgage. You can choose to pay discount points to lower your interest rate. Typically, 1 point lowers your interest rate by 0.25% (one quarter point), however, the amount your rate decreases per point varies depending on the lender and market conditions. Lender fees can vary from mortgage to mortgage. Make sure you look at the cost of PMI or mortgage insurance premiums (MIP) you may have to pay. It’s also a good idea to ask about title searches and other fees you may have to pay, or roll into your loan, at closing.
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4. Choose a Loan Term
Your loan term (the number of years you pay back your mortgage) directly affects your monthly payments and the total amount of interest you’ll pay. Mortgages often have terms of 15, 20, or 30 years. A shorter term means you’ll pay more each month but less in total interest, while a longer-term loan means paying less each month but significantly more interest over the life of the loan.
Common Mortgage Mistakes to Avoid
Whether you’re shopping for your first home or you’re back on the market, there are a few things you should watch out for when choosing a mortgage.
1. Make sure you know your credit health: Lenders look at your credit score to help determine if you qualify for a mortgage, and it can affect the interest rate you’ll get.
2. Identify how much of a down payment you can afford: The amount you put down can affect the types of loans you may qualify for, your interest rate, and your monthly payment.
3. Settle on how long you plan to stay in the house: If you’re likely to move for work or other reasons, you may opt for a different type of mortgage than if you’re looking to stay for 10 or more years.
4. Remember that mortgage rates change: Mortgage rates may change daily based on market forces, so be sure you’re comparing mortgage loans and rates on the same day.
5. Keep your closing costs in mind: Mortgage closing costs are typically between 2%–5% of the loan amount. These costs differ between mortgage types and your financial situation.
6. Look for prequalification before deciding on the right house: Getting a mortgage prequalification can help you make an offer quickly when you find your dream house.
Questions to Ask a Mortgage Lender Before You Choose
Before you choose a mortgage, make sure you understand all the details of your loan. Asking your lender the right questions can help you feel more confident in your decision:
● What mortgage do you recommend for my situation and goals?
● Will you or another company service the loan?
● Will I have an escrow account as part of my monthly payment?
● Will I need private mortgage insurance?
● How long should I expect the approval process to take?
● What is included in my monthly mortgage payment?
● Are there penalties for paying off the mortgage early?
These questions can help you better understand your obligations with different loans and help you choose the mortgage that’s right for you.
Final Thoughts: Choosing the Right Mortgage for You
When finding the right mortgage for you, it’s important to remember that the choice isn’t just about the interest rate. You’ll want to compare loan terms, monthly payments, APRs, and total interest you’ll pay over the life of the loan. Freedom Mortgage will work closely with you to find a mortgage that fits your financial and long-term goals. When you’re ready to start exploring your eligibility, start by getting prequalified today.
Freedom Mortgage is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. This is not a commitment to lend. Application required and subject to underwriting approval and collateral requirements. Full documentation required. Not all applicants will be approved.
Victoria Araj is the Senior Director, Managing Editor at Freedom Mortgage. In her 20 years of working for top mortgage lenders, she’s held roles in mortgage banking, public relations, editorial content, and more. She has a bachelor’s degree in Journalism with an emphasis in Political Science from Michigan State University, and a master’s degree in Public Administration from the University of Michigan. She has spoken at several industry conferences, where she’s discussed the importance of editorial content for brands.
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