Becoming a homeowner for the first time is both an exciting and stressful time. You can easily become overwhelmed with the entire process, including finding a home within your budget, applying for a mortgage, and then closing on the home. Before beginning the process, first-time buyers need to understand how different mortgage loans work.
The vast majority of those homeowners financed their purchases with mortgages. In the past, when shopping for a home loan, a borrower was usually limited to local banks, and building and loan associations. Today, you can borrow from a wide array of commercial banks, credit unions, mortgage companies, and other financial institutions.
Also, while mortgages used to be fairly standardized and uncomplicated, there are now literally hundreds of different kinds to choose from.
Shop for a Home Loan
So, when looking for a home loan, the first thing to decide is what kind of mortgage you should get and how much debt is it going to put me in. Despite all the choices, there are still only two basic types: conventional and nonconventional. And each type comes in two basic forms: fixed-rate and adjustable-rate. Everything else is merely a variation of those themes.
These are those that are not offered, or guaranteed, by the federal government. The majority of borrowers get this type of loan. They usually require a down payment of 5 to 20 percent, meaning that most lenders will finance 80 to 95 percent of the appraised value of a home, or its selling price, whichever is lower.
Most conventional mortgages are heavily dependent on a borrower’s credit score. So if you are seeking a conventional home loan, make sure you know your credit score and have a good credit history. A score above 720 is optimal for a conventional mortgage. A conventional lender will also require that your income be sufficient to afford your monthly payments.
These are loans that are backed by government agencies. The two major types are FHA (Federal Housing Authority) and VA (Veterans Administration) loans. Since these loans are guaranteed by the federal government, they usually require a much lower down payment – as little as 3.5 percent.
They also have lower closing costs and more lenient income and credit requirements. FHA loans are aimed at moderate- to low-income and first-time home buyers. VA loans are available to military members and their surviving, unmarried spouses and require no down payment.
Mortgages of all types can be either fixed-rate or adjustable rates. Fixed-rate mortgages still account for the bulk of mortgages, as they offer predictable payments over the life of the loan, which is usually 30 years, but can be shorter – 15 or 20 – or longer – 40. When prevailing mortgage rates are low and you expect to be in your home for a long time, a fixed-rate mortgage is preferable.
Fixed-rate mortgages are the most common type of mortgage loans. Generally, you choose between a 15 or 30-year loan, with an interest rate that will not fluctuate for the duration of your mortgage. This type of mortgage is great for someone looking for a low-interest rate plan.
Adjustable-rate mortgages (ARMs) are best in a high-interest rate environment. If you believe interest rates to be abnormally high, then you would not want to lock yourself into a high-interest rate for the entirety of your mortgage.
The ARM would be a great alternative because if you are correct and interest rates begin to fall, then the interest rate on your mortgage would drop as well. You must realize if you are wrong and interest rates continue to rise for a substantial period, your interest rate on your mortgage will rise as well.
Adjustable-rate mortgages (ARMs) start with a fixed rate for a specific number of years – two, five, seven, or even 10 — but get adjusted periodically, either up or down, depending upon the movement of a predetermined index. They work best for borrowers who want a low initial rate and don’t expect to live in their homes for a long time.
The hybrid mortgage loan is a combination of a fixed-rate mortgage and an adjustable-rate mortgage. Depending on your financial institution, the mortgage will give you a fixed rate for a certain number of consecutive years, and then the rate will adjust itself each year from then on.
Optional ARM Mortgages
Optional ARM mortgages are the least common of the four; however, they were quite popular between lenders and borrowers in the early 2000’s. Once again it depends on the financial institution that you secure your mortgage with, but the optional ARM mortgage usually offers multiple payment options each month that range from full interest and principal payments to a very low interest payment.
Becoming pre-approved is an important aspect of home buying that is often overlooking. Once you have decided what kind of mortgage best suits you, seek out the different financial institutions that you would like to work with and get pre-approved.
This can be tremendously helpful because it allows you to get an idea of what your price ranges should be based on current lending requirements, and will also allow for you to make an offer on a home. This eliminates the complication of finding your dream home and then worrying about getting approved.
Finally, consider making the largest down payment that your financial situation will allow. Although it might feel good in the beginning to make a minimal down payment and have more cash in the bank, larger down payments correlate to smaller monthly payments and a significant decrease in the amount of interest you’ll pay in the long run.
In addition to significantly decreasing your monthly payments and interest, a 20 percent down payment provides other benefits as well. It helps you avoid having to pay private mortgage insurance, commonly referred to as PMI.
This is an additional fee that the borrower has to pay that protects the lender in situations where mortgage loans are considered higher risk.
Buying a home should be fun, but remember to do your homework and be as thorough as possible when selecting mortgage loans. These tips should help you have a great home buying experience.
Securing a Home Mortgage
Buying your first home is an exciting but often daunting experience. Setting a budget, choosing a house, applying for home loans, and paying off your mortgage – it can be a very overwhelming experience for first home buyers. With so many factors to take into consideration, it is important to understand the process and to be prepared for what to expect. By following some simple steps and being aware of each stage in the home-buying process, it will be a less stressful and much more enjoyable experience.
Determine Your Goals and Budget
The first things to consider are what you are purchasing this property for and how much you can spend. If you are buying an investment property you must consider how much return you will need to make the purchase worthwhile, whereas if you are buying your first home you must consider what sort of property you want to live in.
Establishing a clear and set budget is very important at this stage – you do not want to over-invest and find yourself in financial difficulties. Be sure to consider all of the costs involved in buying a home including taxes, rates, and house insurance. It is a good idea to get various house insurance quotes to get a clear understanding about much you will be spending each year.
Do Your Research and Select the Right Property
While it can be easy to fall in love with properties, it is vital to remember your budget and your reasons for purchasing before making any big decisions. Research the location and the property itself – is it close to amenities? Is the building sound or will it require additional renovation? What laws and regulations are currently in place for the site?
Look at various options and make sure you choose the right property for you. You can employ professional surveyors to look at the building to find any hidden problems that you may not have noticed.
Research Home Loan Options
With so many mortgage brokers and banks providing home loan options, it can be easy to become overwhelmed by which one to choose. When selecting a home loan you should investigate the various options before choosing one that suits you. Ask for the comparison rate – this is the difference between the loan you are requesting and the final amount you will be paying after interest and the rates and fees. While the cheapest option may seem like the best, some of the more expensive loans come with additional benefits such as choice in the frequency of repayments and the ability to make free withdrawals. It is also important to ask about any additional fees that may arise such as government taxes, early repayment fees, and withdrawal charges.
How To Figure Out Which Mortgage Is Right For You
When looking into purchasing your very first home, there are a lot of things to think about. While the whole process can seem a bit overwhelming, with a bit of research and patience, you are bound to locate something that will fit nicely into your family’s budget. Today we are going to discuss a few of the basics every future homeowner should know and prepare for before leaping into the mortgage world.
Fixed versus Adjustable Rate
If you are looking for predictability and consistency and plan to stay in the residence for a long time, then a fixed-rate loan may be your best bet. This type of loan consists of a monthly payment and interest rate that does not change throughout the life of the loan.
However, adjustable-rate loans may be more in your favor if interest rates in the market are high or you do not plan to live in the residence for very long. The interest and monthly payments on adjustable-rate loans will remain the same for a specified amount of time (such as five years) and after that will change depending on the market.
Choosing a Lender and Customizing Your Loan to Fit Your Needs
Fixed and adjustable-rate mortgages are two of the most commonly discussed solutions, but there are many more to choose from, such as interest-only and balloon mortgages.
When locating the right lender, you must select someone who specializes in the type of mortgage you are interested in taking part in. As you are shopping around, be sure to check out the current rates offered by various lenders before making your final decision.
Rates can literally change daily, so it’s important that when you find something you like, you jump on it. Be aware that before you officially ‘lock-in’, the numbers can continue changing so do so quickly when the time is right.
Now that you have the type of loan and lender in mind, it’s time to think a little deeper. The more money you can put down upfront, the lower your monthly payments are going to be.
For this part of the process, you mustn’t overextend your budget. Put an amount down that your family can live comfortably with. Many lenders will offer you a lower interest rate if you can put down at least 20% of the total price of your new home.
Some lenders will allow you extremely low down payments (as low as a few percent) if you aren’t able to pay a large sum upfront. The best thing to do is ask. Make sure to look at the APR of your loan (or ‘annual percentage rate’) because this will help you plan your future accordingly.
If you have an adjustable-rate, this APR can change after a specified period of time so do not forget to keep that in mind when looking to the future and planning out your bills.