You’re in the market for a new home! To make such a major purchase, you’ll need to get a mortgage. Whether this is your first home or your fifth, this is an important step in the homebuying process, and we’re here to talk you through it!
Mortgages Can Be Confusing
Buying a home is typically the single largest purchase most people will make. The process is complex, but the end result is worth it. To purchase a home, you need to find a mortgage.
A mortgage is an agreement between the person buying a home and the lender. If the homebuyer is unable to continue paying on the home, the lender can take back that property with interest. It is possible to avoid getting a mortgage by paying for a home with all cash, but that is difficult for most Americans.
Whether you are a first-time buyer or previous homeowner, it can be tricky to find the right mortgage. Knowing your options is key!
Know Your Mortgage Options
There is no one-size-fits-all mortgage. When looking for a mortgage, consider what you can afford, what you qualify for, how long you want to repay the mortgage, and what other fees or features might be included in the mortgage.
It’s important to understand your mortgage options so that you can determine which one best fits your needs. Mortgage options include:
Fixed-rate mortgage: A fixed rate mortgage means that your interest rate will stay the same over the life of the loan. For homeowners who don’t want to risk changes in interest rates, this is a great option. Of course, the downside is, the rate also will not decrease if mortgage rates drop.
Adjustable-rate mortgage: Adjustable-rate mortgages (ARM) typically start at a lower interest rate, but will change as the market interest rates change. Although your principal and loan term on the house will remain the same, the interest rate on your mortgage will fluctuate. This impacts your overall monthly payment. Those with a flexible budget might be willing to take a risk on ARM if the interest rates are in their favor at the time of the purchase.
FHA loan: If you are a first-time homebuyer, going through FHA, or the Federal Housing Administration with the U.S. Department of Housing and Urban Development, can be a great option. FHA insures your loan so that your lender can provide better options. FHA loans typically offer lower down payments and lower closing costs. They also make it easier for first-time homebuyers to qualify for a loan.
VA Loan: If you are a U.S. veteran, check out the benefits of a VA home loan. You don’t need to be a first-time buyer to take advantage of this option, which offers no down payment, lower interest rates, and lower closing costs. By going through the VA, you also can avoid paying for Private Mortgage Insurance.
Reverse Mortgage: Homeowners typically 62 years of age or older might be eligible for a reverse mortgage. Instead of the homeowner paying monthly bills on their loan, the lender pays the homeowner. So how does that work? A reverse mortgage converts part of the equity in your home into payments that are usually tax free. You can receive the payments and keep your home as long as you are living in it. Interest and fees increase each month. Eventually, when the homeowner moves or passes away, the loan must be repaid.
Bi-Weekly Mortgages: The concept is pretty straight forward—instead of paying your mortgage monthly, you pay half the amount every two weeks. Why? This smaller, more manageable payment might make it easier to budget. Also, paying every two weeks means you make an extra payment each year, which helps you to pay your mortgage faster and cut back on interest. There are drawbacks, however, such as potential fees. Plus, once you move to biweekly payments, you cannot move back. Learn how to achieve the same goal without committing to a biweekly mortgage.
Good Mortgage Rules to Live by
Are you feeling overwhelmed? Take a deep breath and consider these tips:
- Use a mortgage calculator. This will help you estimate your budget. Explore how interest rates and repayment terms impact your monthly payments.
- Budget no more than 28% of your monthly income. When determining what you can afford, budget less than 28% of your monthly gross income for mortgage payments. Also, budget less than 36% of your total debt.
- Consider other costs. A home is a major investment—do not max out with your mortgage! Think about other costs, such as necessary repairs or home improvement projects. You might need a roof or want to add on a patio. Estimate the cost, and be sure you can save or pay for these needs when the time comes.
- Don’t use future estimates. Avoid doing this when calculating what you should spend.
These future estimates are not in stone, and you could either get more or less than you expect.
Bottom Line—Mortgages are Confusing
Mortgages can be confusing whether this is your first experience or you’ve owned multiple properties. Options that worked for you in the past might not work now. Fortunately, a real estate agent who knows the process can help you find what fits your situation.
Contact the team at Denise Ramey today, and benefit from the expertise of our realtors!