March 7th, 2016 6:48 AM by Jackie A. Graves, President
Buying a home is a huge financial commitment, and finding the right mortgage can be a confusing process — especially for first-time homebuyers. Comparison shopping is the key to getting the best deal, and you’ll want to ask yourself, “How much house can I afford?” before getting too far into the process.
Here are six important questions to consider when deciding which mortgage is right for you:
Mortgages generally come in two forms: fixed or adjustable rate. Fixed-rate mortgages lock you into a consistent interest rate that you’ll pay over the life of the loan. The part of your mortgage payment that goes toward principal plus interest remains constant throughout the loan term, though insurance, property taxes and other costs may fluctuate.
The interest rate on an adjustable-rate mortgage fluctuates over the life of the loan. An ARM usually begins with an introductory period of 10, seven, five or even one year, during which your interest rate holds steady. After that, your rate changes based on an interest rate index chosen by the bank.
ARMs look good to a lot of homebuyers because they usually offer lower introductory rates. But remember, your rate could go up after your introductory period, so be sure you’re comfortable with the chance your monthly mortgage payment could rise substantially in the future. Using the terms of the loan, you can calculate what your payment might look like in different rate scenarios.
A point is an upfront fee — 1% of the total mortgage amount — paid to lower the ongoing interest rate by a fixed amount, usually 0.125%. For example, if you take out a $200,000 loan at 4.25% interest, you might be able to pay a $2,000 fee to reduce the rate to 4.125%.
Paying for points makes sense if you plan to keep the loan for a long time, but since the average homeowner stays in his or her house for about nine years, the upfront costs often outweigh interest rate savings over time.
Alternatively, there are negative points. It’s the opposite of paying points: A lender reduces its fees in exchange for a higher ongoing interest rate. It’s tempting to reduce your upfront fees, but the additional interest you pay over the life of the loan can be significant. Carefully consider your short-term savings and your long-term costs before taking negative points.
Closing costs usually amount to about 3% of the purchase price of your home and are paid at the time you close, or finalize, the purchase of a house. Closing costs are made up of a variety of fees charged by lenders, including underwriting and processing charges, title insurance fees and appraisal costs, among others. You’re allowed to shop around for lower fees in some cases, and the Loan Estimate form will tell you which ones those are. Shopping for the right lender is a good way to save money on a mortgage and associated fees.
Before you settle on a mortgage, find out if you’re eligible for any special programs that make home-buying less costly. For example:
Generally speaking, a lower down payment leads to a higher interest rate and paying more money overall. If you can, pay 20% of your home’s purchase price in your down payment. However, if you don’t have that kind of cash, don’t worry. Many lenders will accept down payments as low as 5% of your home’s purchase price.
Be aware: Low-down-payment loans often require private mortgage insurance, which adds to your overall cost, and you’ll probably pay a higher interest rate. Put down as much as you can while maintaining enough of a financial cushion to weather potential emergencies.
Remember these last tips as you’re buying a home:
Taking on a mortgage is an important decision that has huge implications for your financial future. Ask smart questions and explore all of your options to save on costs and find the right loan.
By Deborah Kearns – To view the original article click here