Once you find the right home to buy, things start to move very fast. There are a lot of tradeoffs and choices to make when choosing a mortgage. It’s best to think through those tradeoffs in advance, while you have a bit more time.
Choosing what kind of loan you want now lets you apply for the same kind of loan with each lender. That way, it is easier to compare the offers they give you.
What to do now
The first choice you need to make is the kind of loan
If you're feeling uncertain about which kind of loan is best for you: revisit our guide to the different kinds of loans.
The key choices you have to make about the kind of loan are:
- Fixed vs. adjustable interest rate
- Loan term (for example, 15-year or 30-year)
- Loan type (for example, conventional, FHA, or VA)
If you’re considering a low-down payment conventional loan, there are also private mortgage insurance options. If you’re not sure what the cost difference might be between two or three kinds of loans, ask lenders to give you detailed worksheets for each choice, and compare them side by side. A housing counselor can also help you decide which kind of loan is best for your situation.
Next, consider whether you want to pay points, receive lender credits, or neither
Lender credits are rebates from the lender that offset your closing costs. Points, also known as discount points, are upfront charges you pay to your lender in exchange for a lower interest rate.
- Learn more about how points and credits work, and how to decide which is right for you.
- If you’re interested in considering a loan with either points or credits, ask each lender to show you two options — one with points or credits, and one without. Comparing two options side by side is the best way to figure out which is the better deal. Compare how much cash you need to have at closing, the monthly payment, and how much interest you will pay over the time you expect to be in your home.
What to know
The options you discuss with lenders are not firm offers
Many lenders help you compare the pros and cons of different loan choices using worksheets or printouts that show a particular loan option. These worksheets are very useful for thinking through your choices in advance, before you have found a home or chosen a lender. But, they are not a firm offer. Once you’ve found a home you want to buy, request formal Loan Estimates from each of the lenders you are considering.
Know what kind of loan you want before requesting Loan Estimates
A Loan Estimate is a standardized form that lets you compare costs across different lenders. It’s a good idea to know what kind of loan you want before you request Loan Estimates. That way, you'll get offers from each lender for the same kind of loan, and you can compare them to see which is the best deal.
How long you plan to keep the loan matters
When comparing two potential loan choices, it’s a good idea to consider the shortest and the longest amount of time you can see yourself keeping the loan. For example, whether you should pay closing costs upfront or use lender credits to reduce your closing costs depends on your timeframe. And an adjustable-rate mortgage may start with a lower monthly payment, but can be risky if you keep the loan after the initial interest rate expires.
- Figure out what is the shortest, most likely, and longest number of years you expect to keep the loan.
- Ask loan officers or a housing counselor to help you calculate out the total costs of a loan over each of your three timeframes.
How to avoid pitfalls
Think beyond the monthly payment
It’s important to make sure that you can afford the monthly payment for the loan amount and kind of loan that you are considering. But it’s also important to consider the amount of risk you are taking on (for example, with an adjustable-rate mortgage your interest rate and monthly payment may go up later) and the overall cost of the loan. Some kinds of loans may have a lower monthly payment, but a higher cost overall. Ask yourself which matters more to you.
Don’t count on being able to refinance
Refinancing can often be beneficial for mortgage borrowers. However, refinancing is never guaranteed. If changes in the local economy lower your income or your home value, you may not be able to refinance. And if rates rise in the future, there may not be any benefit to refinancing.