Whether you’re buying your first home or buying your next home, the process of obtaining a home loan can be a daunting, complex task. Some prospective borrowers dive right in by picking a lender based on very little information, maybe just word of mouth from a friend or colleague. These home buyers are cheating themselves. It is crucial to get all the information about the home loan process up front before even considering shopping for a lender, much less settling on one. The vital first step in the process is evaluating the types of home loans available in order to determine which type of loan works best for you.
Home loan comparison is essential if a borrower wants to educate themselves to the fullest before shopping for a mortgage. Savvy borrowers save more money and avoid common pitfalls in the process, and the more you know, the more you can save. Using a side-by-side assessment of all the various types of home loans, along with a frank and honest assessment of your personal finance situation, will help you narrow down your choices and be completely prepared to discuss the matter with whatever lender you choose.
There are many types of home loans, including standard and basic variable rate home loans, fixed rate mortgages, split home loans, loans like low-doc or non-conforming that are designed for specific customers, and loans for certain situations such as construction loans and reverse mortgages. Which type of loan you choose depends on your current home needs and your existing personal finance situation. Every loan has different characteristics, but there are many similar facets a borrower can use to weigh one type of loan against the others. These are the major areas of comparison a home buyer will look at when comparing home loans:
Interest Rate: This may be the top factor that borrowers look at when shopping for a home loan. It’s certainly the one that lenders like to advertise most. You will need to look at your financial situation as well as your personal finance goals and planning preferences when deciding which type of interest rate offering better suits you. If you like to budget and plan your monthly expenditures and don’t like surprises, go with a standard fixed rate. If you’d rather “play the market” and save money in the event that rates go down, then choose a loan with a variable rate. You can also choose a split loan to get the benefits of both.
Down Payment: Each type of home loan has different requirements for how much, if any, money is expected up front to secure the mortgage. Borrowers need to evaluate the amount they can afford to bring to the settlement table when considering which type of loan fits them best.
Term: How long is the term of the loan? Do you want a longer loan with lower payments, or would you like to have this debt “off the books” sooner?
Features: Different types of loans come with various additional features that may make them attractive to borrowers. Some loans may offer the ability to make extra payments, increase the repayment amount or pay off the loan early with no penalty. Redraw and line of credit are popular features for borrowers who may need cash down the line. Evaluate your situation and your needs to decide which features are worthwhile.
Fees: Some loans come with higher fees than others. Typically, loans for non-conforming borrowers or home buyers who may not be able to meet all of a lender’s strict documentation requirements will include higher fees to cover the bank’s risk. When evaluating these non-traditional loans, consider what you can afford when examining each loan’s fees.
Interest rate, down payment amount, term of the loan, features and fees are the major areas on consideration when comparing the types of home loans. It is important to use a home loan comparison table to compare and contrast your home loan options to get the best idea of which loan is the right choice to cover your needs before you even consider shopping for a lender.