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7 Questions You Must Answer Before Getting a Mortgage

09/07/2010

1. Why do you need a mortgage?  This may seem obvious.  "I need a mortgage so I can purchase a home."  Fair enough.  But do you need to purchase a home?  Even if your answer is "Yes," go deeper.  Do you need to purchase a home this year?  Do you need to purchase a home in this city?  Discern your own financial goals and plans before you decide to buy.  Don't pursue a mortgage until you're positive, beyond a doubt, that you're ready for a home purchase.

2. Do you have enough cash on hand?  Again, you might think the answer is obvious.  It's not.  How is your credit score these days?  Lower than you'd like?  Then you'll need more cash, and not just to make the down payment, either.  If you don't have perfect credit, you won't be able to take advantage of the best mortgage rates unless you pay points up front.  This will likely cost you at least a few thousand extra dollars.  And then there are closing costs, of course.

3. How much money should you borrow?  This is going to depend on how much you can pay up front.  But it's not as simple as mere subtraction.  You might save money if you make a lower down payment and spend some cash on points to decrease your interest rate.  Do the math before you borrow.

4. What mortgage term length should you choose?  This will depend on your answer to the first question.  What are your financial plans?  If you intend to live in the house for five years and then sell or refinance, go with whatever term will get you the lowest monthly payment.  If you plan to live in the house for a long time or want to be debt free as soon as possible, go for a shorter term.  But again, do the math.  Determine the best way to meet your needs and save money.

5. What documents do you need to provide?  This is something you need to talk to your lender about early in the process.  It can take weeks to request and receive some federal documents.  Know what your lender needs and when.

6. What happens if you miss a payment?  This is one of the most important things to determine.  What's your lender's policy on missed or late payments?  You should do your best to never miss one, of course, but sometimes life gets out of hand.  Be sure of what the consequences will be.  If the results seem harsh or unfair and you don't think you can be consistent with your loan payments, don't get a mortgage.  Wait until life is less chaotic.

7. How soon can you pay off the mortgage?  Some mortgages come with repayment penalties.  In other words, you can't always make early payments or put in extra money.  Find out what repayment options you have.

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