Get your priorities in order as you search for a mortgage. If you are short on time, then you are short on luck. If you have a poor credit rating, then you are not going to have fun. You need to search for a product that meets your best needs, you want the lowest possible price, and you need a credible and trustworthy lender who won’t pull the rug out from under you.
The Two Questions You Should Ask Yourself
Ask yourself how long you plan to stay in your new home. It should inform your mortgage decision. As can imagine, the longer you plan on staying in the home, the easier it will be to find a mortgage that fits your needs.
The second question is, if the monthly payment increased, how would you feel about that? Would you be happy because you are paying off your mortgage earlier, or would you feel worried about missing payments? Use a service like What’s My Payment and figure out how much your payments would be for the first year, and then run a few scenarios where the payments increased. How do you feel about the results?
Mortgage Payment Fundamentals
Traditionally, you have fixed rate mortgages and adjustable rate mortgages. Your fixed rate mortgage will not change throughout the life of the loan. A variable or adjustable rate will go up and down during the life (term) of the mortgage.
A variable rate mortgage, also known as an adjustable rate mortgage (ARM) will often give you a short period of fixed rate followed by adjustable rates thereafter. For example, the rate may stay the same for the first seven years, and then be up for adjustment every year after that.
If you are planning on living in your house for years and years, then a 15 or 30 year fixed rate mortgage may suit you. If you want the lowest starting rate, then a variable rate is probably for you.
The Fees You Pay
Even though your mortgage rate is important, you shouldn’t overlook the cost of fees. At least when you pay your mortgage, you are paying towards the interest or the actual loan. When you pay fees, it is a waste of money. You are paying money into the lender’s profits and nothing more.
When mortgage companies quote an APR, they are quoting the mortgage rate and the cost of some of the fees. When a company offers a low APR, it probably means they have a low mortgage rate and low fees.
As mentioned, the APR accounts for most fees. Mortgage companies have a way of sneaking additional fees in there. For example, a missed payment fee wouldn’t appear in the APR, but it may be a big issue if you are the sort of person who mismanaged monthly bills.
Your Credit Rating
A large part of how you are judged depends on your payment history, your credit cards, rent payments and so forth. They will also strongly consider how much you already owe since they do not want to compete with your other debt. They will consider how long you have had credit, when you last applied for credit and the types of credit you have. If you have good credit, they will try to entice you with attractive-sounding rates. If you have okay or bad credit, then they will try to rinse you for every penny you have.
These days, if you have a credit rating around the 600 area, then you will get offers, but they will be bad. The closer you are to 850, the nicer your rates and your monthly payments will be.
When they talk about your FICO score, the closer you are to 620, then the worse your APR rate will be, and so the higher your monthly payments will be. If your FICO score is closer to 850, then you will start receiving lower rates which results in a smaller monthly payment. This is true in mathematical terms, but you may ask for a larger monthly payment so that you can pay off the house a little quicker.
Can They Raise My Payments Overnight?
In most cases, yes, the lenders are able to pull the rug from under you and increase your payment amounts overnight. If you have a fixed-rate mortgage, then it is trickier to change your rates and change your payment amounts. If you have yearly rate adjustments, then the lender may decide that you are not paying enough. They may keep your rates the same and demand a higher payment per month, or they may increase your rates and ask for more money per month.
Ideally, you could then go to a different lender and transfer your mortgage to them, but if your credit rating has gone down since moving into your house, or if your circumstances have changed in a bad way (e.g. you lost your job), then other lenders may not take on your mortgage, or may offer similarly high rates.