By Shana Fischer
You finally found it! Your dream home, but now you have to pay for it. Unless you suddenly win the lottery and can pay cash for your home (keep dreaming!) you will have to secure a mortgage for it. A mortgage is a loan from a lending institution in which you agree to pay the loan back plus interest.
There are different configurations for mortgages, but the two most common are fixed (a set period of time usually 15 or 30 years in which the mortgage rate never changes) or ARM (adjustable rate mortgage in which you start with a lower rate and then after a period of time your rate adjusts up based on housing market). ARMs can be risky and tricky; though there are caps in place to stop them from skyrocketing.
Financing your home starts before you even find it. Getting pre-approved can go a long way to securing a home. Pre-approval benefits you and the seller. You know the amount you qualify for and the seller knows they have a solid buyer. You can also choose to get pre-qualified which is more of a big picture look at your finances. Companies like Alliance Home Loans can help you get pre-approval and also help you choose a mortgage that fits your finances.
Once you get pre-approval you will want to look at interest rates. Rates are low right now (around 4.00% for a 30 year fixed), but are expected to go higher. You may want to consider locking in your rate. Locking in guarantees the rate for a pre-determined amount of time: 30 days, 45 days, or 90 days.
Another way to lower your interest rate is by “buying points”. You provide an upfront payment for a lower interest rate. One point is equal to one percent of the loan amount. Experts say one point usually reduces the interest rate by 1/4. Keep in mind you are only reducing the interest rate not the actual loan amount. The points are paid for at closing time in a lump sum when you go to the title office. The IRS does consider “points” pre-paid mortgage interest so you can deduct part of your points come tax time.
Next, you will want to narrow down the type of loan you want. There are many different types of loans: most people choose a conventional loan, this is a standard loan that does not require mortgage insurance, but it does require good credit.
If you are a first time home buyer who doesn’t have a lot of money for a down payment, you may be interested in an FHA loan. FHA stands for Federal Housing Administration which is part of the United States Housing and Urban Development Office and is a government loan. FHA loans require the home buyer to pay for mortgage insurance every month in case they default on the loan. It is a good option for young couples or single people buying their first home who may not have the best credit.
Veterans can qualify for a VA loan. This is also a government-backed loan offered to veterans and does not require any down payment. There is also no maximum loan amount.
When it comes to finding the best loan and interest rate for you, you’ll want to do your due diligence. Shop around. Look at different lending institutions. Look at banks other than your own.
Your home is the single largest purchase of your lifetime. It can be scary and at times confusing, but by doing your homework and with the right people by your side, it can be the best decision of your life.
Want to see people like you go through the home buying process? Two real estate agents go head to head trying to win over a home buyer. Who will win the battle? Watch “Last Home Standing” on YurView.