3 Most Important Questions to Ask Yourself Before Choosing a Mortgage Deal
There are several advantages of buying a home with a mortgage. Even if you have enough cash reserve in your bank accounts, it can still make sense to take out a home loan. Mortgage rates are historically low, so you can finance your home deal with a low-interest loan and invest your cash in a business or something that provides a higher ROI.
While taking out a mortgage may be the right choice, it is equally important to be careful when choosing a home loan deal. If you are not, you may wind up having a financial obligation that can cost you thousands of dollars over the next many years and even worse, get you into legal troubles.
Here are some tips to choose the best mortgage deal for buying a home:
Are you qualified to get the best deal?
You have to meet certain conditions in order to get the best mortgage deal.
First off, your lender should be able to verify all the records about you – from your current address to employment history. For example a lender will run a check on your current employment status and if it is not verifiable, it can have a negative impact on your loan application.
Another requirement is to have a good credit score at the time of applying for a mortgage. Lenders give a lot of weightage to your credit report when evaluating your mortgage application. A good credit score will get you a mortgage with a low interest rate, minimum down payment requirements and a lower processing fee. In other words, it can save you thousands of dollars.
Also, hold off on your plans to buy that new car on payments or change your job after submitting your loan application. Avoid anything that can have a negative impact on your financial history or credit report.
Do you know your budget and how much you can afford?
It is very important to know your budget before you hit the market looking for a home and apply for a mortgage. Lenders will offer you a great mortgage deal if they feel they are not taking a risk by doing business with you. DTI and LTV are two of the most important factors they will take into consideration when evaluating your mortgage application.
A debt-to-income ratio (DTI) is used by lenders to measure an individual’s ability to manage monthly payment. It is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage.
Another formula which will affect the prospects of getting a good mortgage deal is the ‘loan-to-value’ ratio (LTV). It is ratio of a loan to the value of the property purchased. In order to keep this ratio low, you need to put up a good amount of cash as down payment. The best mortgages are available for those with larger deposits of at least 40 per cent – in other words, 60 per cent loan-to-value and below.
Are you focusing only on interest rate?
You will be wrong if you focus only on the interest rate when choosing a mortgage deal. Lenders offer many different types of home loan deals to their customers. These offers differ from lender to lender. For example, you can take out either an adjustable rate mortgage or a fixed rate mortgage. Some will offer the lowest interest rate, but will charge a higher percentage of the loan amount as processing fee and burden you with hidden costs. Others will charge a slightly higher interest rate, but be transparent.
If you feel that you are unable to understand what impact the terms and conditions of a loan offer will have, you can work with a licensed mortgage broker who will compare deals from different lenders and help you decide which one suits your current financial situation and lifestyle.