Explore loan choices
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Once you find the right home to buy, things start to move fast. There are a lot of tradeoffs and choices to make when choosing a mortgage.
It’s best to think through tradeoffs in advance, while you have time. Choosing the kind of loan you want 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 the Understand the different kinds of loans available section.
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 in exchange for a higher interest rate. Points, also known as discount points, are upfront charges you pay to your lender in exchange for a lower interest rate.
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 pay over the time you expect to be in your home.
What to know
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, paying closing costs upfront or using lender credits to reduce your closing costs depends on your timeframe. Similarly, an adjustable-rate mortgage could start with a low 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 the total costs of a loan over each of your three timeframes.
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. You can share these shopping sheets with other lenders you are considering, to get a sense for how they compare. At this point you want to narrow your lenders to three or four that could fit your situation. Housing counselors can also help you compare shopping sheets
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 might not be able to refinance. And if rates rise in the future, there might not be a benefit to refinancing.
