Some basics on choosing a loan to buy your new home
Deciding what kind of mortgage to take out when purchasing a home is one of the biggest financial decisions that most people face in their lives. Considering that many mortgages last 30 years, it’s essential to evaluate the best option for your given financial situation. Here are some tips to determine, and get, excellent value on your home loan.
Preparing for mortgages and homeownership
If you’re serious about owning a home, it’s essential to begin preparing several years in advance. First, you’ll want to take a look at your credit score, as mortgage rates and other fees are often tied directly to your FICO score. Make sure you pay all credit card payments, student loans, and other debts on or ahead of schedule.
You’ll also need to begin saving cash, as most mortgages require a down payment of 20% of the cost of the home you plan to buy. More is always better; if you only need a mortgage for half the cost of the home, you’ll end up paying significantly less in interest and fees over the course of your loan. It’s also important to save in addition to your down payment, as mortgage providers will look at how much cash you have on hand when determining your mortgage rate. It’s a good idea to keep at least 6 months’ worth of payments in savings to account for job losses, pay-cuts, health problems, and other financial emergencies.
Mortgage providers also evaluate employment and income stability when calculating your rates. Lenders generally look for at least two years of stable employment and prefer steady or rising incomes. Long gaps in employment and pay cuts will also reduce the chance of getting a good loan. If you’re a freelancer or own your own business, you’re at somewhat of a disadvantage (you’ll likely have to pay a higher rate than someone making the same amount employed by someone else), so it’s especially important to document all your income and accounts to show the lender that you’re capable of making your payments on a continuous basis.
Fixed rates vs. adjustable rates
The decision about whether to get a fixed rate or an adjustable rate mortgage is a key consideration. While you can certainly save money and will usually require less of a down payment (allowing you to buy a bigger and better house) with an adjustable rate mortgage (ARM), your rates could rise to 11-12% or even higher, depending on the market and your particular agreement.
In many cases it’s safer for first-time homeowners, especially ones operating on a limited income, to go with a fixed rate mortgage. Fixed rate loans make it much easier to budget and plan ahead, which can be extremely important for people who are just starting to take on the responsibilities that home ownership entails.
Keep in mind, however, that if interest rates do fall, you will be losing out on potential savings with your fixed rate mortgage. Some individuals who hold fixed mortgages decide to refinance when interest rates go down in order to take advantage of the lower rate. This too can be expensive, however. Refinancing can cost several thousand dollars as well as require significant time and paperwork, but it can save you money if you conduct the required research and take advantage of any appreciation in the value of your home when you reset your loan.
Methods for finding the best mortgages
To find the best deal, you need to shop around. A survey of buyers in 2013 showed that nearly half didn’t look at different lenders before signing up for a mortgage. You’ll want to ask your accountant, lawyer, financial advisor, or friends and family for recommendations, visit your local bank or credit union and compare rates online.
Depending on your situation, you may qualify for government-insured programs like FHA, VA, or USDA rural development loans. Make sure to do your research about these first, as not all mortgage providers offer these types of loans.
Most importantly, be honest about your financial situation, meet and interview the person who will handle your loan, and prepare for homeownership to cost more than you think – there are nearly always additional expenses that pop up during the life of your loan.
If you need help buying or selling your home, or have more questions about the lending process, contact Dante Disabato at 239.537.5351 or through our online form.