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 mortgage goal.

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 tolerance for risk, which has implications for the acceptability of an adjustable-rate mortgage.

Based on your mortgage goal, identify one or more mortgage options. (Note: We described how to identify mortgage options in the last lesson on preliminary analysis.)

Choose From Multiple Mortgage Options

Now, comes the fun part - evalating your options and choosing the mortgage loan that most effectively achieves your mortgage goal. For each option, you should ask the following questions.

• What size down payment should I make? > Learn more
  
  
• Should I pay discount points? If so, how many discount points? (Note: To conduct this analysis, you will need the lender's current rate sheet. Since rates change daily, get the rate sheet early in the day. That way, if you want, you can lock in the current rate before it changes.) > Learn more
  
  
• 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. > Learn more

The "Learn more" links above go to case studies that demonstrate the analysis. Each analysis uses this site's free mortgage calculator. 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.