Choosing the right mortgage can be a difficult process. From sifting through lenders to getting into the details of their offers, there is a lot to consider when it comes to securing a home loan.
But as long as you know what you want and need before you go looking, the process can be smooth and simple.
Below are six things to look for when shopping for a home loan:
Lower Interest Rates
Before choosing a home loan, you should always see if there is a better interest rate. When you’re dealing with assets worth 6 to 7 digits, those tiny percentage differences may appear insignificant. However, they can have a significant impact over time.
For example, if you are buying a $300,000 home and opt for a 30-year loan at 5%, your monthly payments will be $1500/month with $180,000 in interest over the life of the loan assuming it’s fixed.
If you compare this to another lender’s offer of 4.75% on the same loan, your monthly payments will drop to $1483/month and there will be $172,000 in interest over the life of the loan—that’s a savings of more than $7000.
Low Closing Costs
Closing costs are incremental fees that prospective homeowners get charged before taking out and processing a home loan. Closing costs are the additional fees charged by your mortgage lender or real estate attorney to process your loan, provide insurance during the length of your loan, and other items associated with closing costs.
Typically, lenders will pay for some of these fees but not all, meaning you’ll need to cover at least some of the costs yourself. This can vary from 3 to 6% of the purchase price of the property’s full value, depending on where you live and the price of your home.
Although not an exclusive list, closing costs typically consist of the following:
- Courier fee
- Escrow deposit
- Loan application fee
- Attorney fee
- Mortgage insurance premium
- Property taxes
Offset Account
An offset account works in the same way as a high-interest savings account, reducing the number of years it takes you to pay off your mortgage. The more money you have in your offset account, the greater savings you’ll earn as a result of reduced interest repayments.
Home loans that provide this feature usually come in two forms. The first type, a 100% (or ‘full’) offset account, reduces your home loan’s interest by 100% of your account balance. Variable-rate or fixed-rate house loans are frequently the beneficiaries of this mortgage feature.
The second type of offset account is a partial offset account. Your mortgage is only lowered by a portion of your account balance instead of a complete offset, allowing homeowners to achieve more savings when your offset account has a higher percentage.
Redraw Facility
A redraw facility is an account feature that allows you to withdraw any additional repayments made without incurring a penalty. This means you essentially can give yourself access to your own money, which can be very useful when unexpected costs or bills arise.
One key difference a redraw facility has to an offset account is that the former is included within your mortgage, whereas an offset account is separate from your mortgage.
If you’re debating about which of the two types of mortgage features are better, offset account vs redraw, redraw facilities typically aren’t accessible for fixed-rate loans and have slower wait times on withdrawals.
On the other hand, offset accounts may incur higher interest rates and can also subject the buyer to additional fees on their home loan.
Maximum Home Loan
When applying for a mortgage, the lenders gauge the eligibility of your ability to pay your loan. They do this by assessing your ability to repay the loan over a specified period at a pre-determined interest rate. The maximum home loan is an expressed number that defines how much you can borrow from a lender.
If your income exceeds the maximum amount defined by the mortgage lender, you should encounter little problem in proceeding to the next steps of getting a home loan. However, if your income is below the maximum amount, the lender may deem you unable to meet their payment obligation, rescinding your application.
Type Of Home Loan
Lastly, decide on whether you’re a better fit for a fixed-rate or adjustable-rate mortgage.
A fixed-rate loan features a set interest rate for the term of your loan. This makes budgeting manageable for future homeowners as the payment stays the same throughout the loan’s lifespan.
On the other hand, an adjustable-rate mortgage’s interest rate typically fluctuates throughout its lifetime. It usually starts at a below-market rate at the start of its lifespan, then gradually increases over time.
