How Do I Compare Mortgage Options?

There are many mortgage options available when shopping for a new home or even a piece of commercial real estate. The loan-to-value ratio determines the amount of down payment required on a mortgage, but that may be dependent on the type of mortgage one can get. Obviously, interest rates play a big role in mortgage options comparison, but they may not be negotiable unless one’s credit rating is high. The length of loan, amount of mortgage insurance and buy-down points are also all mortgage options to consider.

Arguably the most important aspect of mortgage options is how much of a down payment will be required. Some lenders will finance up to 100% of the value of the home, but some lenders will only finance 80%. So up to 20% of the value of the home will be in the down payment. This usually constitutes the largest percentage of the settlement costs due at closing. Buyers without money set aside for a down payment must shop lenders in order to try to find a mortgage option requiring as little down payment as possible.

A loan’s interest rate can literally mean a difference of tens of thousands of dollars during the life of a conventional 30-year loan, so it is one of the more important mortgage options to consider. The interest rate is typically dependent upon the buyer’s credit score — the higher the credit score, the lower the interest rate. Buyers can shop different lenders to try to find the lowest interest rate.

There is also a big difference between the types of interest rates available amongst mortgage options. A fixed rate mortgage stays the same throughout the life of the loan. An adjustable rate mortgage is typically lower for the first few years, but then adjusts up or down depending on the market. There is more risk with an adjustable rate mortgage and less certainty about what the payments will be each month.

The length of the loan is another important mortgage option to consider. A typical home mortgage is 30 years, but many lenders have introduced 15- or 20-year mortgages. This allows the buyer to pay down the loan much more quickly and save thousands in interest.

When shopping for a mortgage, one should be sure to ask about the option of buying points. Points are reductions in the interest rate in exchange for cash up front. It might behoove a buyer to pay less of a down payment and instead purchase as many points as the lender has available. This may save thousands of dollars in interest costs during the life of the loan.