Purchasing a home is one of the biggest investments you will make in your life, probably one of your most important financial decisions. But it’s not just the decision that’s difficult but also the succeeding steps you need to take towards your ultimate dream of homeownership.
One of these steps is getting the financing you need. If you’re among the majority, you don’t just find all that hefty sum lying idle in your bank account to pay for your prospective house in cash. In fact, many people struggle to get financing, owing to difficulty in their various credit situations.
If you are a first-time homebuyer, it is recommended to start with one question: how much can I afford? Once this dilemma is resolved, you can then move towards the next steps and find the mortgage that’s right for you.
The following are important considerations to keep in mind when choosing a home financing product.
FRM or ARM?
Mortgages come in either fixed rate or adjustable rate depending on how your interest payments are structured. Fixed rate mortgages are those mortgages in which your interest remains constant throughout the life of the loan. The only part of your mortgage payment that fluctuates are the taxes and insurance. Many homebuyers opt for the stability of FRMs. Knowing that their rate won’t change throughout the years makes it easier for them to plan their future finances.
On the other hand, an adjustable rate mortgage has introductory periods wherein interest is lower compared to that of FRMs. This makes them attractive to homebuyers who plan to refinance their mortgage before the introductory period expires. Introductory periods can be 1, 5, 7, or 10 years. When this period ends, rates would change subject to an interest rate index chosen by the bank.
On which to choose between the two is always dependent on your own plans. Choose accordingly.
How about points?
It is possible to lower your interest rate by paying an upfront fee that typically costs around one percent of your mortgage. This is a good strategy if you plan on keeping your mortgage for a long time. However, if you refinance or decide to move in a few years, you might not have time to recoup the cost.
There are also negative points in which the lender will reduce their fees but raise your interest rate. Weigh the gains against the losses. Do a proper estimate before you pay for points.
Underwriting and processing fees, title insurance fees, and cost of appraisal are some of the things included in your mortgage closing cost. This amounts to an average of 3 percent of the purchase price of your home. Look into these fees when you go shopping for mortgage lenders.
There are various government-backed mortgage programs that cater to low-to-moderate income borrowers. Find out if you are eligible for these programs. FHA, VA, USDA, and other homebuyer assistance programs for many first time homebuyers are available.
Can you pay the conventional 20 percent down payment on your mortgage? The higher the down payment, the lower your interest rate will be. If you can’t pay at least the minimum down payment requirement, lenders may charge you with a mortgage insurance to cover the risk.
In choosing the best mortgage rate, be sure to:
a) compare offers
b) never limit your choices to traditional banks; you can get home loans from credit unions and your local lending sources
c) don’t apply immediately; ask for estimates first and limit your inquiries to twice a week as frequent credit inquiries could damage your credit score
To get professional assistance, contact one of our lenders. Begin your journey today!