How to Choose a Mortgage
During the year through mail or telemarketing, you probably receive
countless loan offers. And every offer guarantees low rates and
superior customer service. Since they can't all be best, how will
you choose a mortgage that is right for you?
Mortgage Choice: You Are the Boss
Here is one way to think about mortgage choice.
Lenders have a lot of money. To buy a
house, you need a lot of money. People like you and me should be
grateful when a financial institution loans us money.
Resist this perspective; it motivates you to focus on
pleasing the lender in order to get a loan.
Here is another mindset. You want to borrow a lot of money.
Lenders need to loan money. Whoever loans you money
will earn a fair return. Take this perspective when you choose
a mortgage. It motivates you to
expect reasonable rates and very good service from the lucky lender
that gets your valuable business.
When it comes to mortgage choice, remember
your role. You are not a supplicant, hungry for scraps.
You are the boss.
Your Mortgage Goal Is Your Road Map
As the boss, you have clear expectations about what you
want when you choose a mortgage. Your expectations are
spelled out in your
The mortgage goal describes your main objective (to minimize
mortgage cost over a specific time period), and it describes the
maximum resources you
will expend to achieve that objective (upfront fees,
monthly mortgage payment, etc). The mortgage goal may even define your
risk, which has implications for the acceptability of an
Based on your mortgage goal, identify one or more mortgage options.
(Note: We described how to identify mortgage options in the last
Choose From Multiple Mortgage Options
Now, comes the fun part - evalating your options and choosing the
that most effectively achieves your mortgage goal. For each option,
you should ask the following questions.
- What size down payment should I make?
- Should I pay
If so, how many discount points? (Note: To conduct this
analysis, you will need the lender's current
Since rates change daily, get the rate sheet early in the day.
That way, if you want, you can
the current rate before it changes.)
- During the period that I own the home, what is the total
mortgage cost? This is the key question. You will choose the
mortgage option that has the lowest total cost, consistent with
the constraints specified in your mortgage goal.
The "Learn more" links above go to case studies that demonstrate the
analysis. Each analysis uses this site's free
With the calculator, it takes just minutes to evaluate each
option and choose the mortgage that best meets your needs.
Following the analysis, take a moment to congratulate yourself.
You have quickly identified the low-cost mortgage option and probably
saved thousands of dollars in the process. Hooray!
You may ask: Do I really need to do this analysis myself? Won't
my broker or loan officer do this work for me? If they will do this
analysis, by all means, let them. But you should also do it
yourself. You have more at stake than they do; and, frankly, you
will do a more careful, complete analysis. Let their work
serve as a check on yours.
Remember the Lender
The above discussion assumed that the lender was known. In practice,
the choice of mortgage and the choice of lender are intertwined.
The next lesson covers
how to choose a lender.