It’s the most major financial investment many people will ever make: Buying a home. It can be a complicated process, especially for first-time homebuyers.
Here are three tips to finding the right mortgage for you:
1). Line Up Financing
Getting prequalified or preapproved for a mortgage isn’t a requirement for buyers, but it’s a good step to take. As a buyer, you can understand in advance what loan you’ll receive and what the amount you can borrow will look like. This is very advantageous at many junctures of the house hunt, because it can direct your budget, manage your expectations and strengthen your negotiation position when you’re ready to make an offer on a home. To make the approval decision, the bank will ask you for thorough credit records and income documentation. Part of whether the bank grants you approval depends on two income-to-debt ratios established by leading mortgager Fannie Mae. First, monthly mortgage principal and interest payments, plus insurance and property taxes, cannot exceed 28% of your gross monthly income. Also, total monthly debt payments (car payments, credit cards and housing), are limited to 36% of your gross monthly income.
2). Roots or Wings?
Are you wanting to set up shop in this new home-have your children here, eventually watch your grandchildren play in the backyard? Or is this just the first home of many for you, as your career might possibly take you across the country within the next few years? No one has a crystal ball of course, but having a general idea of whether you want to lay down more temporary digs versus permanent roots will help clarify your decision about what type of mortgage you want.
If you plan to live in the home less than five years…an adjustable rate mortgage (ARM) might be the best option for you. ARMs offer lower initial rates than other mortgage options and most ARMs include a cap on rate increases for any given year, as well as over the life of the loan, which is only about five years. This affordability speaks very strongly to buyers looking for less of a permanent commitment.
However, if you can’t ever envision leaving the home you’re about to buy, you might want to consider a fixed-rate mortgage. A fixed-rate mortgage provides protection against rising interest rates by maintaining the same interest rate, monthly principle and interest payment for the entire term of the loan. Thirty-year and 15-year terms are the most popular among homebuyers, as the longer term lowers the monthly payment while the fixed rate provides stability.
Another mortgage option is a balloon payment, which is a lump-sum payment that pays off the loan fully after a fixed period of time. The rates on balloon mortgages are 25-75% less than rates on 30-year fixed mortgages, but payments are similar during the initial 3-15 years. After this period, the remaining outstanding principal balance is due in full, and this is a good option for homebuyers who plan to sell before then.
3). Get a Good Faith Estimate
This is a list of all the costs associated with closing the loan, including bank fees and third-party fees. Getting a good faith estimate is a helpful tool for the potential homebuyer to gauge the affordability of their mortgage loan.
As you can see, preparation will be key to you being able to skillfully navigate the mortgage process and finding the home that fits you best.
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