Your home is likely the biggest purchase you will ever make. Not only is it a huge financial commitment, but it is a commitment that you make using borrowed money. No other loan that you get will likely compare to your mortgage loan. Your mortgage will be huge, and there is a good chance you will make payments on it for decades.
This means that you need to choose the right mortgage for you. All personal finance is, well, personal, and that includes getting the mortgage that best fits your needs.
What are Your Financial Goals?
“You have to know your goals before you get a mortgage,” says Sam Dolato, the Director of Mortgage Banking for Quicken Loans. “Know your goals and what you want to accomplish. Make sure that your mortgage fits your needs short-term and long-term.”
Understanding your long-term financial plan is essential as you move forward. If you know that you are going to move in the near future, it might not even make sense to buy a home and tie yourself down with a mortgage. The exception is if you know that you want to rent the home out after you leave. Having a plan for your home, and for your overall finances, makes a lot of sense as you move forward.
From knowing when you want to retire (so you can have your mortgage paid off by then) to understanding whether current monthly cash flow or long-term interest savings is more important to your situation, it’s vital that you know where you stand and what you hope to accomplish. Once you understand yourself and your financial goals, you can make a better decision about what mortgage is right for you.
Which Term is Right for You?
“Once you know what your financial goals are, you need to figure out a term that will work for you,” says Dolato. “What if you want to retire in 15 years?” he continues. “If you can handle the payments, a 15-year mortgage might make more sense.”
However, Dolato also cautions about getting a 15-year loan just to hit some retirement deadline. If your current concerns are more about cash flow, a longer-term loan with a lower payment might make more sense. (Of course, you might also have to re-think your retirement goal if you are in this situation.)
He also encourages homebuyers to consider how long they can realistically expect to stay in the home. “If you know you are staying put for a long time, a shorter term with a higher payment can be beneficial,” Dolato points out. “But what if you know you will leave soon? Then you should look for a longer-term loan, because it means you keep more in your pocket right now, and you aren’t staying to pay off the loan anyway.”
Carefully weigh the pros and cons of different term lengths, and consider different scenarios so that you have a clear idea of what to expect. Dolato also points out that you will need to consider rates and fees, and how they impact the overall disposition of your mortgage and your finances. “It takes a little effort to figure out what you want, and to understand the implications of the tradeoffs between rates, fees and mortgage terms,” he says. “But it’s worth take a look at, and taking a little bit of time, since this will affect you for years to come.”
What About Refinancing?
Choosing the right mortgage for you also includes refinancing. What might have been a great mortgage for you at one point might not still work for you a few years down the road. “Consider looking into a refinance every couple of years,” suggests Dolato. “There are always new programs and deals. You should at least see what’s available, and see if something else will work better for you.”
Another reality is that sometimes your goals and needs change. Your finances aren’t stationary. Life and money are fluid, and what you need might change over time. “Decide whether or not you want to make a financial change,” says Dolato. “Sometimes it’s not a matter of figuring out a right time, but more about what you want to tweak in your financial situation.”
Dolato cautions about getting too caught up in chasing lower rates, and thinking that you have to rush into a decision to refinance — or even buy — because of current rates, or market trends. “You have to understand what’s going to be good for you at that particular point in time, even if it’s different from what everyone else is doing.”
He points out that a good mortgage lender or broker can help you review your options to refinance or buy. “Look at your own goals, and figure out what you want to get done, and don’t be afraid to tell your lender what you want to have happen.”