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Everyone dreams of owning a home one day. Studies show that more than 39% (or 99.3 million) of Americans plan to buy a home in the next couple of years. If you have been yearning for and are ready to own a home, you then need to compute how much you’d be able to afford.
The first step here is to familiarize yourself with the current mortgage rates and find a good lender for financing. If you have been saving for the same, the down payment will play a crucial role in determining your mortgage rates and which lender to go with. The key here is to get the best mortgage rates possible. Outlined below are quick questions to ask yourself if looking for the best deal possible.
1. Get an Adjustable-Rate Mortgage or Fixed Rate Mortgage?
A mortgage can either have adjustable or fixed interest rates. A fixed-rate mortgage means just that; you’ll be required to pay a predetermined interest rate throughout the life of the loan. The biggest percentage of your contribution/payment goes to principal and interest, with the remaining percentage going to property taxes, insurance, and other charges. The latter may fluctuate depending on the market.
An adjustable-rate mortgage means that it will start on an introductory period, say 10 or 5 years, during which you’ll be required to pay a fixed mortgage rate. It is only after the introductory period that the mortgage rates will change. ARMs are beneficial because introductory mortgage rates will be lower, though they could rise once the period is over. There are instances when your monthly mortgage payments may be higher than they were in the introductory stage. Talk to your lender to see what your options are.
2. Should I Pay for Discount Points?
Some borrowers may choose to pay for discount points to help keep their mortgage rates lower. One discount point can be as much as 1% of the loan amount and help lower your interest rate by around 0.25%. If your mortgage loan is at 5% interest, paying a $2000 fee can reduce the rate to 4.75%.
While the percentage may seem small at first, you will be saving more, especially if your loan is set to run for at least 7 years. It is worth noting that you will be shelling out thousands just to save a few dollars in monthly payments. Depending on the market value of the points, interest rate, and total loan amount, you might be able to break even in just a few years. Discount points thus only make sense for long-term loans.
3. What Are Closing Costs?
These are fees charged by lenders and other parties. Although closing costs may influence your pocketbook, your mortgage rate will remain unchanged (not unless you had paid discount points). As the name suggests, closing costs are only paid when you finalize or close the purchase and are calculated based on the purchase price (approximately 3% of the total value/cost). These costs may comprise title insurance, the lenders’ underwriting and processing charges, and appraisal fees, to name but a few.
4. Do I Qualify for Special Programs as A First-Time Home Buyer?
Some research and due diligence is required before settling on a loan. Chances are you qualify for special programs as a first-time homebuyer that would make the purchase more affordable. Most states have programs designed to help first-time and repeat home buyers find affordable options and financing. You might be eligible for some of these programs, such as down payment assistance, tax breaks, and favorable rates, among other perks. It is also worth noting that some programs can be specific – a good example of this are programs targeting specific areas or professions, including veterans, first responders, and teachers.
5. How Much for Down Payment?
Rural borrowers and veterans may qualify for no-down-payment options with 100% financing. Some loans allow other borrowers to pay a down payment of as low as 3 or 3.5%. These include:
– VA loans: Most people that served in the military or are active, qualify for the Department of Veterans Affairs mortgages.
– USDA loans: The Department of Agriculture guarantees low to no down payment mortgages for individuals living in rural areas. It may also cover closing costs for the same.
– FHA loans: Loans insured by the Federal Housing Administration allow for as low as 3.5% in down payment. FHA loans can help cover those with poor credit scores for as long as they pay insurance for the entire duration of the loan.
– Conventional Loans: Some people qualify for loans that aren’t insured by the government, attracting as low as 3% in down payment. These types of loans are specially designed for low to moderate-income and first-time borrowers. One however is required to pay for private mortgage insurance, which can be canceled as he/she gains more equity or pays up to 20%.
6. How To Compare Loans?
– Apply with multiple lenders: Mortgage lenders use different ways to calculate mortgage rates. Applying with more than one lender, including credit unions, banks, and online lenders, should give you an idea of how much they charge, and compare their packages as well.
– Window-shop within a specified period: Shopping around with different providers can help you determine how much you qualify for. However, it would be advisable to shop within a specified period of time with all these lenders for better comparison. You want to do this within this period to ensure it doesn’t affect your credit score.
– Use loan estimates to compare closing costs: Almost every lender has an online loan estimate calculator for potential clients to use. You can thus use different lenders’ loan estimation calculators to see how much you’d be paying at the end of it all. This should give you a better idea of where you can save and who has a better overall deal.