How To Choose A Mortgage Lender
You have decided you are ready to purchase a home, or refinance your current home. The next step is finding the right mortgage lender. The next step is finding the right mortgage lender and you need to know how to choose a mortgage lender from the many mortgage lenders available and to avoid the many pitfalls many borrowers fall into. With so many choices out there, it can be difficult to decide who to go with. You are taking the right step by reading this article, to determine what you need to know, what you need to look out for, what questions you need to ask, and what offers you need to be aware of. We assume you are following a structured process that looks like this:
- Strengthen your credit
- Determining your budget
- Know your mortgage options
- Choosing a lender by comparing offers (rates, terms, etc) from multiple lenders
- Getting preapproved for a mortgage
- Read the fine print
You may already be aware of many of the moving parts required to make your decision, so please feel free to jump to the section most important to you. We are going to examine the following:
- Types of mortgages categorized by mortgage rate type
- Types of mortgages categorized by issuer / insurer
- Types of mortgage lenders
- Determining factors for comparing mortgage lenders
- Questions to ask a mortgage lender during your investigation/research
Sometimes you may find the many details around mortgages overwhelming. Taking a mortgage is a life-changing decision and definitely deserves very diligent effort. A wrong decision could cost you dearly both in dollars and emotionally.
Types of Mortgages Categorized By Type of Mortgage Rate
Before finding the right mortgage lender, you should decide on what type of mortgage rate you are looking for. The type of mortgage rate is crucial because it will have a direct impact on your monthly mortgage payments. There are four common types of mortgage rates:
With a fixed-rate mortgage, your interest rate will stay the same for the entire length of your loan term. This type of loan provides stability since your monthly payment will never change, no matter how much market rates fluctuate. If you know you can afford the same house payment every month for several years, a fixed-rate mortgage may be right for you. Why will everyone not go for a fixed rate mortgage? Because the interest rate is higher than an adjustable-rate mortgage (ARM). Then why should I ever choose a higher fixed-rate mortgage? The advantage of a fixed-rate mortgage is that you’ll always know exactly how much your monthly principal and interest payment will be, so you can plan accordingly. You’ll never have to worry about your payment going up if market rates rise, which gives you peace of mind.
Adjustable-Rate Mortgage (ARM)
With an adjustable-rate mortgage (ARM), your interest rate could go up or down over time, depending on changes in the market. ARMs typically start with a lower interest rate than fixed-rate mortgages, but after an initial period, they can adjust upward or downward to keep pace with the market. If you’re comfortable with some degree of uncertainty in your monthly payment, an ARM may be a good option for you. Many people choose ARMs because they initially have lower monthly payments than fixed-rate mortgages. While there is a potential benefit of enjoying lower rates for a period of time, it comes with the risk that your payments could go up in the future.
A hybrid mortgage is a cross between a fixed-rate and an adjustable-rate loan. You can choose a hybrid loan with an initial fixed rate that is lower than a comparable fixed-rate loan. After a set number of years, the interest rate will adjust and may end up being higher than a comparable ARM.
Types of Mortgages Categorized By Issuer And Insurer
Mortgages can also be categorized by who issues the loan. The three main types of issuers are the government, banks, and mortgage companies. Government-issued loans are either insured or backed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Department of Agriculture (USDA). They tend to have more relaxed requirements than loans issued by banks or mortgage companies.
- Government-Insured Federal Housing Administration (FHA) Loans
- Government-Insured Veterans Affairs (VA) Loans
- Government-Insured U.S. Department of Agriculture (USDA) Loans
Bank-issued loans are not backed by any government agency. They tend to have stricter requirements in terms of credit score and down payment. Mortgage companies are a type of lender that emerged during the subprime mortgage crisis to provide loans to borrowers with less than perfect credit. Some mortgage companies only deal with high-risk borrowers, while others work with a range of clients.
- Mortgage companies
The mortgage loan originator is the first person you speak with when seeking a mortgage. The Maine Bureau of Consumer Credit Protection (BCCP) is responsible for ensuring that all mortgage loan originators in the state are licensed and follow all state and federal laws. You can check to see if your loan officer is licensed by visiting the NMLS Consumer Access Website.