“Once you’re a homeowner, your house will probably be the biggest, long-term investment you have. Every dollar you spend on a mortgage or down payment is like putting money in a house-sized piggy bank, so it makes sense to look at home buying through the lens of saving.” – Rachel Cruze
Are you considering purchasing a home in 2020? Succinctly stated, several reasons justify the motive for investing in a property. Here are three of the most relevant reasons:
- You may be a first-time homebuyer.
- Or you might be purchasing an investment property.
- Or, you might own an existing property which is too large or too small to suit your current needs. Therefore, you need to downsize or upsize respectively.
As the quotation by Rachel Cruze mentioned above notes, buying a home, whether via a mortgage or making a cash purchase, is a long-term investment. In other words, it is akin to a long-term savings account. In summary, buying a house is one of the most valuable investments you can make.
The reason for considering a residential property purchase is not the raison d’etre behind this article. However, it is important to be cognisant of these reasons as they provide a basis from which to drive the decision-making process.
Statistics show that the utilization of the mortgage investment vehicle is a primary means of purchasing a home. According to Statista.com, in 2018 there were “5.96 million homes sold in the U.S.” Additionally, in the third quarter of 2019, “the home mortgage debt of households and non-profit organizations amounted to approximately 10.52 trillion U.S. dollars.”
And, finally, statistics cited by Pymnts.com show that, in 2016, about 29 percent of all residential property purchases were via cash transactions. Thus, circa 71 percent of all people buying a home needed to use the mortgage vehicle.
Therefore, based on the assumption that you will more than likely need a mortgage to purchase a home, the question that begs is not whether you should purchase a residential property or not. Rather, it is which mortgage company you should approach to apply for a mortgage.
Types of mortgages
Before we answer this question, let’s consider the different types of mortgages available in 2020. According to Abby Hayes, in her article titled “16 types of mortgages explained,” there are sixteen different types of mortgages. Here is a succinct summary of the primary loan types:
These include Federal Housing Administration loans, VA loans, US Department of Agriculture loans, as well as the Indian Home Loan Guarantee mortgage.
Fixed rate mortgage
This loan type’s primary feature is that its interest rate is fixed. In other words, it stays the same from the inception of the loan until it is fully paid off. Additionally, it can be taken out over a thirty-, twenty-, or fifteen-year period.
Variable (or Adjustable) rate mortgage
The ARM or adjustable-rate mortgage is essentially linked to the Central Bank’s interest rate. Ergo, when this rate increases by a quarter of a percentage, for example, the mortgage interest rate increases by the same percentage. And, when the Central Bank decreases the federal interest rate, the mortgage interest rate decreases correspondingly.
Tips to help you choose the best mortgage company
The final question to ask and answer is: “How do you choose the mortgage company that will offer you the best deal?”
Here are a few of the more important answers to this question:
Know your credit score
In summary, credit score translates into risk. In other words, the higher your credit score, the lower the risk, or the greater the chance of you repaying the loan without defaulting. Juxtapositionally, the lower your credit score the higher the risk of defaulting on your monthly mortgage repayments.
Therefore, your credit score influences the loan interest rate that a mortgage lender will offer you. Thus, the lower the credit score, the higher the interest rate and vice versa.
Also, it is essential to remember that, at some point, your credit score will be too low for a successful loan application. Thus, it is essential to know your credit score and creditworthiness at the outset of the loan application process. It will help you negotiate the lowest interest rate possible.
Compare interest rates
As inferred above, different mortgage brokers will offer potential lenders different interest rates. Therefore, it’s vital to shop around for the loan with the lowest interest rate. Essentially, the lower the interest rate, the less the total repayment amount (loan capital plus interest over the loan period).
Seek mortgage loan pre-approval
If you know exactly where you stand regarding the financial side of the home purchase, you will be able to negotiate the sale price from a point of strength. It will make the whole process simpler, quicker, and easier.