As you enter your homeownership journey, remember that this process looks different for everyone. When it comes to choosing a mortgage, consider what will work best for you and your family’s financial future. Selecting a mortgage term that aligns with your financial goals is essential, as it determines the duration of your loan and the amount of interest you’ll pay over time. First, let’s consider mortgage terms. A mortgage term refers to the length of time over which you’ll repay your loan. The most common mortgage terms are 15 years and 30 years, but other options exist, such as 10-year and 20-year terms. Each term has its advantages and considerations, so it’s essential to assess your financial situation and long-term goals before making the best choice for you. 

From banks to credit union mortgages and everything in between, let’s discuss ways to personalize the process, so when the question, “How much home can I afford?” pops into your head as you scroll through online listings, you’ll know the answer. Follow along as we guide you through how to select the best mortgage for your goals.

Assess Your Financial Situation.

Let’s start by mapping out your financial situation, including your income, expenses, and debt. It’s also important we consider your long-term financial goals, such as saving for retirement or education. Then let’s ask ourselves the following questions:

• How long do you plan to stay in the home? If you anticipate moving within a few years, a shorter-term mortgage might not be the most suitable option.
• What is your risk tolerance? Shorter-term mortgages can save you money in the long run but may come with higher monthly payments. Evaluate your financial stability and comfort level with higher payments.
• What are your other financial goals? Consider the impact of your mortgage term on other financial objectives, such as saving for retirement, education, or investments. Longer-term mortgages may offer more flexibility in this regard.

Consider Additional Costs.

Some first-time homeowners forget to factor in the additional costs of a mortgage loan and then get sticker shock when they sit down with a lender. These costs can include property taxes, homeowners insurance, homeowners association (HOA) fees, and any additional recurring costs. This is why it’s so important that we always read all fine print closely! 

Another important thing to always look out for is interest rates. Think of interest rates as the cost of your home. Mortgage interest rates tend to be lower for shorter-term loans. Consider the current rate environment when making your decision, as it can influence the affordability of a shorter-term mortgage.

Finally, generally, financial institutions want to see a debt-to-income (DTI) ratio of 36% or lower to approve you for a loan. This means that all your debt, including the monthly mortgage payment, shouldn’t total more than 36% of your gross household income. Sometimes you may find that some community-based, not-for-profit credit unions tend to have more flexible standards and are far more likely to consider the member’s complete financial picture in determining financing solutions compared to big banks. 

Understand Your Credit Score.

Your credit score may be crucial when looking for a mortgage. ​​Obtain a copy of your credit report and check your credit score. A higher credit score often results in better mortgage terms, as it is a good measure of your financial health. Your credit score may directly impact the interest rate you’ll be offered. Higher credit scores often result in lower interest rates, which can significantly affect the overall cost of your mortgage. Lenders use your credit score to assess your creditworthiness. A higher credit score increases the likelihood of loan approval, while a lower score may lead to higher interest rates or even rejection. Knowing your credit score helps you understand the mortgage amount you can qualify for and the monthly payments you can afford. This information is crucial for creating a realistic budget.

Another benefit of having a strong credit score is your negotiation power when looking for a mortgage. If you have a high credit score, lenders may be more willing to negotiate terms and offer better deals with lenders. It may also give you a competitive advantage if multiple buyers are interested in the same home. You’ll be able to streamline the mortgage approval process which may also give you a competitive edge. Lenders may process your application more quickly, and you may have a better chance of securing favorable terms.

If you find that your credit score is less than ideal, understanding it allows you to take steps to improve it before applying for a mortgage. This may involve paying down existing debt, resolving any credit report errors, or taking other corrective measures.

Explore Different Types of Mortgages.

Finally when mortgage shopping, don’t be afraid to explore different mortgage options. Buying a home is not a one-size-fits-all process. Research various mortgage types, such as fixed-rate mortgages, adjustable-rate mortgages (ARMs), FHA loans, VA loans, and others. Understand the advantages and disadvantages of each type and how they align with your financial goals, a good mortgage lender should be able to present all these different options to you and discuss how they will financially benefit you. 

A fixed-rate mortgage is one where the interest rate remains constant for the entire term of the loan. The advantage here is predictable monthly payments make budgeting easier. Protection against interest rate fluctuations. An adjustable rate mortgage on the other hand is one where the interest rate is variable and may change periodically based on changes in a corresponding financial index. This may bring its own set of advantages such as you may start with lower initial interest rates with the potential for lower rates if market interest rates decrease, however, payments can increase if interest rates rise, which may be riskier for long-term stability.

Another type of mortgage loan is an FHA loan, insured by the FHA, these loans often have lower down payment requirements and more flexible qualification criteria. These tend to have lower down payment options and are more accessible for borrowers with lower credit scores. VA Loans, insured by the Department of Veterans Affairs are available to eligible veterans and active-duty military members and typically offer no down payment and competitive interest rates. 

These are just some of the mortgage options available available to you as a prospective homeowner. Consult with one of our Wilkes Mortgage Group professionals to find the best mortgage for you and your family.