In todayâs hot real estate market, finding a house you can afford can be a major challenge. But finding a house isnât the only frustrating thing about house-hunting. Finding the right mortgage to buy the house may be even more complex, overwhelming and stressful. That said, if youâre going to buy a house, youâll probably need one, and making the right decision on your home loan can save you money for years to come.
Hereâs how to find the right mortgage while keeping your stress level in check.
Before you start looking for you dream house, itâs important to figure out how your monthly mortgage payments will affect your budget. âDonât let a lender or broker talk you into a loan that is more than youâre comfortable with,â said Kim Anderson, a financial advisor with Rooted Planning Group, based in Fargo, N.D. âThe monthly payment shouldnât be so great that [a person] canât save for retirement or college or vacations or whatever else is important to them.â
In the long run, focusing your search on houses you can easily afford may be one of the best ways to reduce the overall stress of buying a home and taking out a mortgage. Mike Caligiuri, a Columbus, Ohio-based financial planner explained, âWhen people see that they can buy a house and still become financially independent, it takes a lot of the stress away.â
Not sure how much house you can afford? Consider using an affordability calculator to help you plan before you start shopping. But remember, this calculator will show you the top end of your budget. It may make sense to buy less house and have smaller payments.
One of the most stressful times to shop for a mortgage is when you already have an accepted offer on a house. Once you have an accepted offer you have a lot of financing work to do. You have to find a lender, decide on a mortgage and submit all your loan documentation. Then the lender has to put the loan through underwriting. All this work doesnât leave much time for shopping for the best rate. Matthew Broom, an Atlanta-based financial planner explained, âIf you want to be able to act quickly when you find a home you love, you need to begin preparing long in advance. That includes getting preapproval from multiple lenders.â
During the preapproval process, some lenders allow you to âlock-inâ an interest rate for a period of time. But even if you canât lock in a rate, getting preapproved can help you shop for a house with confidence.
Ian Bloom, a CFP with Open World Financial Planning in Raleigh, N.C., advises clients to, âbe upfront with the lenders, and tell them what you want. Explain that you donât want the financing part of the process to be a problem. The lenders are salespeople, and they should want to earn your business.â
One major source of mortgage-shopping stress can be the complexity of mortgage products. To reduce that stress, only consider mortgage products you really understand. âUnless youâve got a good reason [to choose another mortgage], I think a plain vanilla, 30-year fixed rate mortgage is a great choice,â Bloom said.
Of course, you may have a good reason to choose a 15-year fixed rate mortgage, a construction loan or some other unique loan. But if youâre planning to live in your house a long time, itâs tough to go wrong with a mortgage where your payments will stay the same for thirty years.
When it comes to finding the best rate on your mortgage, consider starting your search online. Itâs especially important not to assume youâll get the best interest rate by walking into a local bank or credit union. Caligiuri told MagnifyMoney, âThere are online mortgage companies that give substantially better rates than your local banks. Youâll get the best rates by comparing lendersâ. He also emphasized that online mortgage comparison tools may help you get to the best deals more quickly. âIf Expedia works for travel, why wouldnât you use the same type of technology for a bank loan?â Caligiuri posited.
Comparison shopping online is a great way to find the best rates without the pressure of a salesperson pushing you to make a decision. When you do start speaking directly with a lender, be sure to mention that youâre comparing lenders. This may encourage them to offer their best rates right away.
Some lenders will require a lot of documentation from you before you can officially complete your application. Expect to provide bank statements, W-2 forms, recent pay stubs, tax returns, evidence of your current rent or house payment and proof of identification. Instead of waiting for instructions from a lender, gather all of these documents into a single electronic (or physical) file folder. Then you can send copies as the loan officer requests them.
Once youâve officially applied at a lender, the lender will give you a written loan estimate within three days. The loan estimate isnât an official loan offer. But having an estimate in hand can dramatically reduce your stress. Plus, the loan estimate shows the important numbers to understand, like your loan APR and the monthly payments.
When you have a loan estimate in hand, a lender may push you to put down a refundable deposit to lock in a loan rate. They are understandably eager to close a deal with you, but the lenderâs timeline isnât your timeline. Do not put any money down until youâve had the opportunity to review loan estimates from multiple lenders.
Instead of making a hasty decision, ask the lender for a day or two to review the loan estimate and compare it to other offers. Then, take advantage of the time to review the loan estimates.
When youâre comparing offers, focus on the APR (Annual Percentage Rate). The interest rate tells you the cost of borrowing money, but it doesnât include the fees. APR, on the other hand, includes the total cost of the loan. Caligiuri explains, âThe APR bakes in all the costs and fees of borrowing. Itâs really the most important number to consider.â
Borrowers should pay attention to upfront costs (such as discount points or mortgage origination fees) to be sure they have the cash on hand to cover the fees. But if you have enough cash to close the loan, then the APR number will tell you which loan is the best deal. You want to choose the loan with the lowest APR.
While comparing rates and fees is important, choosing the lowest cost loan might not always be in your best interest. âI tell clients to compare rates with two or three different lenders, but to choose the person who is easiest to work with,â said Bloom. âYouâll probably make a better decision when you work with someone who doesnât stress you out.â
If you want to work with a lender that didnât offer you the best rate, ask if they have a rate matching policy. Some lenders will match the written offers from other lenders. Even if the lender doesnât match rates, you may want to choose a lender for reasons other than the loan cost. The right lender should make you feel confident in your decision, and the more comfortable you feel, the happier youâll be in the long run.
Taking out a mortgage is a huge financial commitment. You want to make a decision about the loan with as little frustration and outside pressure as possible. By giving yourself a long timeline, preparing your budget and understanding the loan, you maximize your chances of success while minimizing your overall stress.