Finding a property is only half the way down; the other half is choosing the best type of mortgage. Selecting the right mortgage is an important decision and can affect your financial health. While looking for the mortgage loan, whether it be a new purchase or a refinance, knowing which loan type is suitable and why is paramount. For a first time buyer, this is a big decision to decide which mortgage best suits your need with so many options available in the market.
There are two components to a mortgage: Principal and the interest. Principal accounts for the loan amount while interest refers to the additional amount that the lenders charge you for borrowing money. During your term, you pay monthly instalments based on the loan amortization schedule. Mortgage loan interest rates that form the base of any calculation tend to vary depending on the lender, client profile, and the loan proposal. We are not talking about some household shopping; this is going to be the most significant financial decision of your life. Keep the below-mentioned tips in mind so you can make the right choice of your mortgage loan; this process is made a lot easier, and you can get a loan that meets your needs and budget.
Tips to Choose the Best Mortgage
- Check your credit score
Your credit score or CIBIL score is significant while buying a loan. It is necessary to find your credit score before considering any loan options. Your score has a significant impact on the types of loans you are eligible for, the money that you can borrow, and the mortgage loan interest rate. A good credit score gives you an edge to bargain, and you can settle for lower interest rates. It also affects your future loan buying options.
READ ALSO: 14 Ways To Get Cheap Motor Insurance
- Set your budget
Since buying a property is a six-figure purchase, you must get all your research and calculations done right to know whether it’s in your reach. A mortgage loan calculator can aid you to arrive at the estimates of your monthly instalments considering your income, employment status, loan amount, loan type, interest rate, and repayment tenure. The expenditure includes buying the property, furnishings, property tax, insurance, and maintenance costs. All of this should be estimated and planned well before applying for the loan so that you can afford any overhead expenses arising later.
- Length of the loan
The tenure of the loan has a significant impact on your financial commitment. Usually, when you hear of a 20-year mortgage loan, it may choke you, but there are options available where you can choose your loan tenure based on your ability to repay. If your income and other financial commitments allow you a more significant payment and short tenure loan; you may get benefits of reduced interest expense and a better mortgage rate. Longer the loan tenure, a higher amount of interest you got to pay.
READ ALSO: Tips for Purchasing Commercial Firewood
- Borrowing capacity
Lenders usually lend after factoring in your income, credit score, current financial commitments, employment status, age, family size, and current loan requirement. Every lender has different criteria to arrive at the maximum amount that you can borrow. Some may lend 4-5 times of your income, or some may lend covering 7%0-80% of your total requirement. When you already have high debt payments in your financial cycle, then the maximum mortgage may be lower than you expect. If your estimated monthly instalments make you house poor following your current income, then it may affect your future financial health. Your borrowing capacity also depends on your savings and deposits, more significant deposits less you have to borrow, and the lower loan-to-value ratio. A lower loan-to-value ratio qualifies you for lower mortgage rates.
- Understand the available loan options
It is advisable to thoroughly research and learn about the available loan options in the market. By discovering in detail about the features of different loan options, you can make sure that the lender you choose has the best to offer. There are various mortgage loans available. While selecting the right mortgage, there are generally two choices: Fixed-rate mortgage or Adjustable-rate mortgage. With a fixed-rate mortgage, the interest rate throughout the lifetime of the loan remains fixed, and there might not be any increase in your monthly payments. In an adjustable-rate mortgage, the interest rate varies according to the market movements. Which mortgage to choose depends on your financial position, state of the economy, and your risk appetite.
The choice you make while selecting the best mortgage is going to affect your financial health for a long duration. So it is essential to take enough time and put in the effort for ample research to arrive at the best available option. There is no right mortgage option, the choice may vary based on what you can afford, what you have to do with the property, and your personal preferences.