Finding your dream home can be challenging, but securing the right loan doesn’t have to be. With the right approach—which includes using our loan comparison calculator—you can quickly and efficiently determine which mortgage product best suits your personal and financial needs.
What to know before you apply for a mortgage
There are many things to think about before you apply for a mortgage. The homework you complete upfront will put you on the right path to finding, applying for, and hopefully securing the mortgage that’s best for you.
Consider the following five questions before you start your search and move one step closer to buying a home:
1. What is your current housing budget?
Review your current housing budget, even if you’re renting, to better understand how much income goes out each month. Are you comfortable with this amount? Would you rather spend less? Do you have the income available to spend more?
2. What is the maximum mortgage payment that you’re comfortable managing?
This goes along with question #1 above. Once you know the ins and outs of your current housing budget, you can decide on the best approach moving forward. Pinpoint this number and stick to it during your home search.
Try out different loan scenarios in a mortgage calculator to get an idea of how different down payment amounts and loan terms would affect your monthly payment.
3. Are you interested in a fixed rate or adjustable rate mortgage?
There are pros and cons to both types of mortgages. Closely compare them to find the type that’s best for you right now and in the future.
A fixed-rate mortgage charges a set rate of interest that remains the same for the life of your loan. An adjustable rate mortgage has an interest rate that adjusts — up or down — based on the market.
4. What can you expect to owe in closing costs?
This varies based on many factors, including the lender you choose, the cost of the home, and underwriting and processing fees. Your lender can provide you with a closing cost estimate once you have a home under contract.
Common closing cost fees include:
- Title insurance
- Deed transfer tax
- Appraisal
- Property survey
- Prepaid taxes
- Prepaid home insurance
- Real estate agent commissions
5. How much money have you saved for a down payment?
It’s simple—the larger your down payment, the smaller your monthly mortgage payment. Though most loan products will allow for a lesser amount, shoot for a minimum of 20 percent. This gives you immediate equity in your home, while also allowing you to avoid private mortgage insurance (PMI).
What’s included in a mortgage payment?
The principal amount of your loan has the biggest impact on your mortgage payment. This is the agreed-upon sales price. For example, if you agree to purchase a home for $300,000, subtract your down payment from this amount and that’s how much you need to borrow.
Other factors that impact your monthly payment include the loan term and interest rate. You may also opt to include property taxes and home insurance coverage in your monthly mortgage payment.
As you alter the details above, your mortgage payment will change. For instance, if all else remains the same, a 30-year loan will have a smaller monthly payment than a 15-year loan.
Along with your mortgage term, It’s important to understand how your interest rate impacts your loan and finances in general. Here’s a scenario to consider:
- Loan amount: $300,000, Loan term: 30 years, Interest rate: 5 percent, Monthly payment: $1,610
- Loan amount: $300,000, Loan term: 30 years, Interest rate: 4.5 percent, Monthly payment: $1,520
As you can see, an interest rate of only .5 percent lower saves you $90/month. Over the course of a 30-year mortgage, this equates to a savings of $32,400.
How to compare mortgages
One of the biggest mistakes you can make is choosing a mortgage type before comparing all your options. This could lead you to make a poor decision that costs you money (and causes stress) in the future.
The best way to compare mortgages is with a loan comparison calculator. This allows you to compare two loans with different variables for:
- Loan term
- Home price or value
- Down payment
- Loan amount
- Interest rate
Is a 30-year or 20-year mortgage best for you? How does a 20 percent down payment compare to a 25 percent down payment? What happens if your interest rate is higher (or lower) than expected?
Buying a home is one of the biggest — if not the biggest — financial decisions of your life. Unless you’re buying your home outright with cash, you’ll need a mortgage to complete the transaction. Compare as many loan types as it takes to make an informed and confident decision.
How to prepare for the application process
With the help of the internet, applying for a mortgage is easier today than ever before. But that doesn’t mean you should walk into the process unprepared. There are several things you can do to prepare yourself for what’s to come.
Review your financial circumstances
This is where your home buying journey should begin. Review your financial circumstances to answer questions such as:
- How much of a home can you afford?
- What is your credit score?
- Is there anything on your credit report that could harm your chance of securing a mortgage?
- How much money have you saved for a down payment?
As you review your financial circumstances, you’ll either solidify what you already thought to be true or uncover additional information that will affect your path forward. You may discover, for example, that there are errors on your credit report to dispute. This is the time to get everything in order.
Collect the necessary documents
Your mortgage lender will request various documents early in the process. They need these to make a decision on your application. These documents include but are not necessarily limited to:
- Tax returns
- Pay stubs
- Bank statements
- Rental history
- Retirement account statements
Collecting and sharing these documents upfront can speed up the process.
Ask questions
If you have questions, you can expect your lender to have answers. But remember this: they can’t help unless you open up. Common questions to clarify with your lender include:
- What types of mortgage products do you offer?
- What does the preapproval process consist of?
- What interest rate do I qualify for?
- What is the down payment requirement?
- Am I able to complete the application process online?
There’s no such thing as a silly question when buying a home. If you neglect to collect the necessary information before applying, it could come back to haunt you in the future.
Tip: If your lender is unwilling or unable to answer your questions, consider making a change. You deserve a high-quality customer service experience.
Do you need personal guidance?
Using our loan comparison calculator is a good start, but there may come a point when you require personalized assistance. At AAA Banking, we’ve designed an online system for helping you better understand your situation and what’s available to you.
Of course, you can always email us at HomeLoans@acg.aaa.com or reach out via phone at (844) 878-4764. Our mortgage loan officers are available Monday through Friday from 8:00 am to 8:00 pm EST.
Photo by RODNAE Productions