Choosing a Mortgage

Choosing a mortgage is a complicated decision. Although your interest rate is important, you should take other factors into account, such as how long you plan on staying in your house and what kind of loan you want.

1. Avoid the worst mortgages for first-time home buyers.

A huge benefit to being a first-time home buyer is that you’ve never fallen for an awful mortgage—and you don’t have to!

Many first-time home-buyer loans only make you put a little money down, but they cost tens of thousands of dollars morein the long run. Don’t fall for it! Remember—if it seems like a good deal for you right now, then it’s an even better deal for your lender in the end.

Avoid these low-to-no down payment mortgage options:

  • Adjustable-Rate Mortgages (ARMs): ARMs suck you in with a low initial interest rate. But then, your lender raises your rate, and your mortgage payment goes up. No, thanks!
  • Federal Housing Administration (FHA) Loans: FHA Loans are popular for first-time home buyers because you can put as little as 3.5% down. But you waste thousands of dollars on mortgage insurance (similar to PMI) for the life of the loan.
  • Veterans Affairs (VA) Loans: VA loans let veterans buy homes with no down payment or PMI. But they carry a bunch of fees and usually charge high interest rates.

2. Know the best mortgage for first-time home buyers.

I only recommend 15-year fixed-rate conventional mortgages. Here’s why:

  • Quicker payoff time – With 15-year loans, the monthly payments are higher than 30-year loans. But you’ll pay off your mortgage in half the time. Plus, most 15-year loans have a lower interest rate, saving you tons of money.
  • Locked-in interest rate – A fixed-rate loankeeps your interest rate the same over the life of the loan, so you pay less interest and always know what to expect.

How a 30-Year Mortgage Compares

I’ll just say it: 30-year mortgages may have a lower monthly payment, but they cost more in the long run. Like tens of thousands of dollars more.

Imagine you want a $300,000 house with 20% down. You need a mortgage for $240,000. Even if the 30-year loan and the 15-year loan offered the same interest rate (unlikely, since 30-year rates are almost always higher), the 30-year mortgage still costs more.

  15-Year at 4.5% 30-Year at 4.5%
Number of Payments 180 360
Monthly Payment $2,181 $1,562
Total Interest Paid $90,447 $197,778
Total Amount Paid $330,447 $437,778

You’ll save $107,331 with a 15-year fixed-rate mortgage—and you’ll be payment-free 15 years sooner. I mean, hello!

3. Pick a lender you’re comfortable with.

Some lenders onlycare about profits, while others actually care about helping you become a homeowner. Talk to at least three lenders. Compare their interest rates, fees and customer service to find the best one for your finances and peace of mind.

If you’re debt-free like me, you need a lender whodoesn’t require a credit score. (Because you don’t have one anymore—yay!) So look for one who does manual underwriting.

4. Get preapproved for a loan before house hunting.

It pays to get preapproved for a loan (not just prequalified). Preapproval is when your lender verifies your financial information and gives you a letter saying how much money you can borrow.

Preapproval shows sellers you’re serious, and you can use your letter to get ahead in a competitive market.

Just know some lenders may preapprove you for a bigger loan than you can afford. But you don’t have to borrow that much—or look at houses that are too expensive!

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