Getting your hopes set on the perfect home and then finding out that you are unable to afford it can be devastating. To avoid this from happening, only look at homes that are within your budget. One of the best ways to determine this is to obtain a mortgage pre-approval.
When you speak with a lender about a pre-approval, it is important to know your options. There are two types of rates and a few different options for loan terms.
You could opt for an adjustable or a fixed rate loan. Most adjustable rate mortgages (ARM) start with a period of one to ten years at a fixed-rate which is followed by a period of adjustable interest rates. The initial period has a lower interest rate than a fixed-rate loan. However, once this period is completed you may incur higher payments if the mortgage interest rate has risen. There is a cap on the amount the interest rate can increase and how often it may be adjusted.
The other option is a fixed rate mortgage. For the entire length of the loan, the interest rate will remain the same. With this option, you will be secure from rising interest rates; however, you will not be able to take advantage of lower interest rates unless you refinance your mortgage down the road.
Finally consider the loan terms. Generally, you will receive a lower interest rate for a shorter term loan. Similarly, the longer the term of the loan, the higher the interest rate is likely to be. What you want to keep in mind is that the longer period loans will decrease your monthly payments because you have a longer period to pay off the loan. Your lender can review these options with you so you can make an educated decision.