How to Choose the Best Mortgage

By: Sheryl Nance-Nash

While only you can decide what house is ideal for you, when it comes to mortgages, there is a road map of sorts to help you. Here’s how to get what you need.

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Few things are as big a deal as a buying a home, especially the first time. It’s exciting, intimidating, and can be overwhelming. You’re committing to spend a significant sum or money, putting down roots and venturing into new financial territory – home ownership. Not only do you want to pick the “perfect” house, you want to get the best mortgage.

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Set a Budget

Figure out how much house you can afford. “You need to know how much you're able to spend and pay back. This will also determine how long you'll be paying the mortgage off for,” says Charlie Worrall, a marketing executive for Ogilvy and Sneyd.

If the monthly payment for a 15-year mortgage is too much for you to comfortably handle, go for a 30-year mortgage. The payment will be lower than you will pay longer. “When first looking for a mortgage, don't forget that there will be admin fees and other associated costs. Make sure you add those into your budget.

To keep track of money and payments, it's worth creating a spreadsheet and forecast the potential payments you're able to make,” says Worrall.

“When first looking for a mortgage, don't forget that there will be admin fees and other associated costs. Make sure you add those into your budget. To keep track of money and payments, it's worth creating a spreadsheet and forecast the potential payments you're able to make”

Understand the Details

Fixed vs. Adjustable

One of your biggest choices is to decide between a fixed-rate mortgage or an adjustable rate mortgage (ARM). Much depends on the current interest rate environment.

If rates are relatively low (which at the moment they are still relatively low, historically speaking), a fixed-rate mortgage may be the better option, says Joe Zeibert, senior director of products, pricing & credit for Ally Home and co-author of Mortgage Playbook.

If rates are relatively high, an ARM may make sense because its lower initial interest rate can lead to a lower monthly payment for a specific time period – usually, five, seven, or 10 years – before the interest rate can be changed by your lender, he says.

Choose

Mortgage rates are based on many factors, some are determined by the lender, while others reflect the borrower's credit and housing characteristics, or even by events in the broader mortgage market. The price of your mortgage depends on both the interest rate and the discount points. Discount points, known simply as “points,” are fees paid directly to the lender at closing in exchange for a lower interest rate. They are called “points” because each point is equal to 1 percentage point of your loan amount.

If you choose to pay discount points at your closing, you can secure a lower interest rate for the life of your loan (this is called a “buy down”). “The decision whether to buy down your interest rate depends on many factors, including your desired monthly payment, your available funds for closing, and how long you plan to remain in your property,” says Zeibert.

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Pick your Mortgage Provider Carefully

Customer service is critical. Be sure you know the specific ways they will guide you through the mortgage application process. When evaluating lenders, consider their reputation, service (i.e. will they be there when you need them), interest rates, loan options and points -- a quick online search will tell you if they are competitive, lender fees and closing costs and convenience – like being able to upload, review and sign documents online.