Buying your first home is a significant financial commitment. Since you’re likely to have your mortgage for decades to come, you’ll want to make sure you get it right the first time. You can avoid a costly financial mistake just by doing a little research and preparation before you sign any papers with a lender.
Decide on a Loan Type
Mortgages come in different forms, each with advantages and disadvantages. A fixed rate loan, for example, has a set interest rate for the entire term. An adjustable rate mortgage, however, has an interest rate reset at a time specified by the lender. A balloon mortgage is short-term, with low payments during the loan term and a large lump sum due at the end.
You need to apply the pros and cons of the different mortgage types to your personal circumstances before you decide which kind to apply for. A fixed rate mortgage is a more stable payment schedule than you’d get with an adjustable rate loan, but if you’re not planning to own the home for long, an adjustable rate may offer a lower interest rate during the initial loan period.
Calculate Your Limits
You must be able to afford the monthly mortgage payment for the loan type and amount you’re getting. If you can’t make your payments, you will lose the home in a foreclosure. Make a budget that includes all of your bills throughout the year. Use the budget to determine how much you can spend on a mortgage payment each month.
Don’t forget to include emergency savings in your budget calculations. As a homeowner, you’ll be responsible for repairs and other issues you’d normally go to your landlord for help with.
Do a Credit Check
Your credit is a significant factor in the loan process, from approval to the setting of your interest rate. Make sure your credit is as clean as possible before applying for a loan. Take care of any old debts that are still on your credit reports and make sure you pay all your bills on time. Late payments can lower your score.
If you have to do any credit clean up with old debts, wait at least six months or so before you apply for a mortgage. The information has to be updated on your report before you approach the lenders.
Look at mortgage rates for first time buyers and get multiple quotes from lenders. Try to group the applications over a short period to prevent a negative impact on your credit report. Credit bureaus group inquiries for similar products together if the applications are made around the same time.
Look at the details of all the offers you receive. The interest rate is a significant consideration, but you also have to look at the loan type, other fees and the downpayment amount the lender will require. If you can’t make a higher downpayment to the lender with the best rate, you may have to take another offer.
Anna is an experienced real estate industry writer. She has been writing for websites and printed media for more than a decade and has covered many financial topics, including mortgage rates for first time buyers.