How to Choose a Mortgage: Tips for Getting the Best Loan

Most homebuyers don’t spend a lot of time learning how to choose a mortgage. After all, looking for the right property is the fun part.

But it’s important to know how to pick a mortgage. Buying a home will have a huge impact on your finances, and getting the most affordable mortgage will allow you to fully enjoy your new home instead of stressing over how much it costs.

1. Set a budget

Before you get a mortgage, you’ll have to budget for two things: the upfront costs of the home purchase and the recurring monthly payments.

Upfront costs

The upfront costs of buying a home can be substantial and include:

  • Down payment: 0% to 20% of the sale price, depending on your loan program’s requirements.
  • Closing costs: Typically 2% to 5% of the sales price, depending on your loan and location. The higher end is more likely to apply if your area charges transfer taxes on home sales. Besides taxes, origination fees and points are the biggest closing costs.
  • Moving costs: A local DIY move might not run you much, but a professional out-of-state move can cost thousands of dollars.
  • Furnishing and sprucing costs: While totally optional, many people immediately want to do things like paint their new home’s interior, replace the flooring, and buy things like window coverings, a guest bed, or home office furniture.

Recurring costs

The best mortgage options can minimize the recurring costs in your monthly mortgage payment.

  • Principal and interest: Your principal is the amount you borrow to purchase a home. Interest is the cost of borrowing that money. The lower your principal and interest rate, the lower your monthly payment will be.
  • Property taxes and homeowners insurance: Your lender may require you to pay a portion of your annual property taxes and homeowners insurance with each mortgage payment, especially if you put down less than 20%. If not, you’ll need to set that money aside yourself to pay these bills when they’re due.
  • Mortgage insurance: If you don’t meet the down payment requirements for your loan, you’ll likely have to pay for mortgage insurance. For a conventional loan, these costs would be part of your monthly mortgage payment.
  • HOA dues: If your home belongs to an association, you’ll need to budget for monthly association dues, though you’ll pay them separately from your mortgage.

Debt-to-income ratio

Creating a budget will also allow you to figure out how much of your monthly income is going toward debt. To qualify for a loan, you’ll want to make sure your debt-to-income ratio is no higher than 50%.

So, if your monthly income is $6,000 and you’re already spending $1,000 per month on loans and credit card payments, make sure to budget no more than $2,000 toward your monthly mortgage payment.

Find out how much you might owe monthly — and over the life of a loan — using our mortgage payment calculator below.

2. Find the right type of mortgage

There’s not one best type of mortgage. Different mortgages satisfy different needs. Here are the most common types of mortgages to help you choose the right loan for you:

Conventional loan

Conventional loans are widely available, but they can be harder to qualify for than government home loans. To qualify, you’ll need to put at least 3% down and have a credit score of 620 or higher.

With Credible, you can see prequalified rates on conventional loans in a matter of minutes. Our online tools allow you to easily compare all of our partner lenders and secure a great rate — checking rates is free, and it won’t affect your credit score.