4 Factors to Think About When Selecting a Home Loan


Home loans are such a common part of American society that it’s easy to forget just how significant a mortgage can be in the financial life of a family. If you’re getting ready to purchase a house, it’s important that you don’t just accept the first offer you get. Instead, it’s wise to consider the process from all angles.

The Importance of Selecting the Right Loan Product

First-time homebuyers – and even some seasoned buyers – often operate under the assumption that getting a mortgage is like buying a pair of shoes: Find your size, try it on, and slide your card. But this is a grave misconception. Loans are as diverse as cars. Just as a vehicle comes in different makes, models, engines, colors, trim levels, and features, home loans present an array of choices that must be carefully considered prior to making an investment.

A failure to select the right loan product could leave you in a financial pinch where you’re unable to pay other bills and meet basic needs. The knowledge and discipline to choose the right product will promote flexibility and enhance your ability to spend, save, and invest with purpose.

4 Factors You Must Consider

At first glance, you may feel as if your options are limited. However, as you do some digging, you’ll discover that there are plenty of options available to you. As you shop around for a home loan, consider the following factors:

– 1. Loan Term
Most homebuyers select a 30-year mortgage repayment schedule, but you have the option of choosing other loan terms. While a 30-year mortgage gives you more time to repay the loan – and thus lowers your monthly payment amount – it’s the most expensive product on the market. You pay for this additional time in extra interest.

Run the numbers and see what it would cost you to get a 15-year or 10-year mortgage instead. Though your monthly payment will increase significantly, you’ll save tens of thousands of dollars in interest over the life of the loan.

– 2. Loan Type
While the fixed-rate conventional home loan is by far the most common product on the market, there are plenty of other options out there. Adjustable rate mortgages (ARMs) are fairly common and make sense in some situations. (If you know you’ll be moving within the next three to five years, you can typically save some money by going with an ARM.) Then there are FHA loans, VA loans, and even agriculture loans for homes in rural areas.

– 3. Interest Rate
The interest rate is obviously an important component of your home loan. You’ll find that most major mortgage providers will offer pretty similar rates based on your financial history, credit score, and loan amount. However, it’s certainly worth shopping around for the most competitive rate you can find.

– 4. Monthly Payment
Most people begin with the monthly payment in mind, but this is actually one of the last elements to consider. By saving it for last, you avoid making the mistake of overpaying in interest at the expense of having a lower monthly payment in the present. That being said, it does matter. Figure out how much room you have in your monthly budget and how much house this will allow you to purchase. (Be sure to calculate the true monthly payment. This means you’ll need to consider PMI, property insurance, property taxes, and principal and interest.)

Think About the Future

If you screw up and select a bad car loan, it’s not the end of the world. You’ll spend three to five years paying for the mistake, but it won’t permanently disfigure your financial body of work. If you mess up and choose the wrong home loan product, though, there isn’t nearly as much margin for error.

A mistake on a home loan can affect you in major ways for 10, 15, or even 30-plus years. It can drain tens of thousands of dollars from your budget and prevent you from saving, investing, and enjoying your earnings in other ways. The wrong mortgage will feel like a ball and chain that you’re forced to lug around wherever you go. Emotionally, psychologically, financially, and even physically, the wrong home loan will adversely impact every area of your life.

But the opposite is true, as well. A good loan product – one that’s well-vetted, flexible, and affordable – is a blessing. It’ll enhance your financial picture and strengthen your future. It’ll give you the opportunity to live life on your terms. And at the end of the day, isn’t that what we all want?