Financing a home for the first time is a huge undertaking with long-term stakes. It’s easy to get tangled up in all the features to evaluate, from interest rates to down payments and loan structures. Follow these steps to find the best mortgage you can get.
1. Shop around
Look at a range of lenders using online searches and tools, including this one from the U.S. Consumer Financial Protection Bureau. It’s best to get a broad sense of the rates being offered in your area. If you work with a mortgage broker, you may be charged a fee.
2. Weigh fixed or adjustable rates
Deciding between a fixed-rate loan or an adjustable-rate mortgage, or ARM, will affect both the cost and the degree of risk you’ll take on. An ARM usually offers lower rates at first but can change with the market later. Consider how long you plan to stay in the house, which can make a big difference. If you intend to move within five years, for instance, a loan with a fixed rate for the first five years that converts to an adjustable rate later may be cheaper than a fixed-rate loan with little added risk. If you plan to remain and raise a family in the home, 20- or 30-year fixed-rate financing is probably a better choice.
3. Understand other costs
Once you get information from your selected lenders or brokers, compare loan rates, terms, points, fees, down payment size and mortgage insurance costs. Also be sure you know about:
- Points: A point is an upfront fee paid to the lender, equal to 1% of the loan amount, to reduce the interest rate. Points can help cut the cost of a long-term mortgage but otherwise the interest savings may not cover the expense, meaning it’s not worth it. Use an amortization calculator to see how much you can save and over what length of time, based on the lender’s terms.
- Down payment: Generally, the less you put down, the higher the interest rate you’ll pay. Some lenders require 20% of the purchase price down. Others may accept as little as 3%, and some subsidized programs let buyers borrow with no money down. Typically, putting down less than 20% means paying for private mortgage insurance, or PMI.
- Transaction costs: Remember that you may also pay loan-origination fees, a deed transfer tax, underwriting fees, charges for a lawyer who represents the lender, home inspection costs and a title search.
4. Check eligibility for special programs
The U.S. Department of Housing and Urban Development offers grants and programs that can lower down payment requirements. Among these are loans backed by the Federal Housing Administration, or FHA, and first-time homebuyer assistance programs from state agencies. The U.S. Department of Veterans Affairs can help current and former members of the military finance home purchases, sometimes with no money down, while the U.S. Department of Agriculture supports loans in certain areas for eligible borrowers.
5. Apply to a few lenders within 30 days
When you apply, lenders will generally make a hard credit inquiry, which can drop your credit score a few points temporarily. But it’s better to have multiple inquiries for home loans made within a 30-day window since the credit-scoring process used by the three major rating companies sees this as rate shopping and counts them all as one inquiry.
By knowing loan terms, services and programs available, you’ll be better prepared to finance that first home.
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