Before You Buy, Check Out These Mortgage Options
If you want to buy a home, you’ll probably need a mortgage.
Buying a home is not just financial, it’s emotional; paying for it requires a clear head. A few thoughts to get you started:
KNOW YOUR NUMBERS
Before you hire an agent and start hitting open houses, figure out what you can afford and recognize that only you can make this call. You’ll run into a variety of number-crunching characters during your house hunt who may offer to help get you into a home you think is beyond your means.
Going online can help you get a sense of what mortgage rates and products are available, but be careful.
“A number of sites and less scrupulous mortgage brokers may try to sucker you in with lowball rates,” warns Eric Tyson, a former financial counselor and author of “Home Buying for Dummies” and numerous other books. “They’ll either misrepresent what’s available or they won’t disclose all the fees.”
GET PRE-APPROVED
Knowing what kind of home loan you can afford before you start looking is great, but getting preapproved for a loan can make a big difference when it’s time to make an offer. More rigorous than a “prequalification,” pre-approval involves more scrutiny on the part of the lender and carries greater weight with sellers.
Borrowers who are preapproved for a home mortgage loan are usually provided with a letter stating that their finances are in good order.
FIXED VS. ADJUSTABLE
Fixed-rate mortgages are just what you’d think: Their rates don’t change, which means your monthly payment will remain steady for the life of your loan. 30-year fixed-rate mortgages are the most popular.
You can get a lower interest rate with a 15-year home mortgage (a popular mortgage refinancing option) but monthly payments will be higher.
Adjustable-rate mortgages (ARMs) have home loan rates that vary depending on what’s happening with interest rates overall. That means your monthly payment could change every six months to a year, or even every month.
ARMs often start out at a lower interest rate than fixed mortgages, which may allow borrowers to qualify for bigger mortgage loans, because they’ll have lower monthly payments.
If you don’t plan to stay in your home for a long time, this might be a good deal for you. But once the initial (teaser rate) bargain starts to rise, monthly payments will go up, and in a rising rate environment, they may go up precipitously.
CREATIVE MORTGAGE PRODUCTS
With 45 percent of first-time buyers putting no money down on their homes, the National Association of Realtors reports, there are a plethora of mortgage products available.
Many start out with lower mortgage rates, which lure buyers who are stretching to afford a home, but can come back to bite them down the line.
Interest-only loans are attractive to cash-strapped buyers because of artificially low payments in the early years of the home mortgage. The payments are low because you’re paying nothing toward the principal.
Make no mistake, they will go up. Depending on your home loan, the monthly payments could jump 40 percent or more, so if you go this route, make sure you’re able to pay.
One way to get a stable monthly payment with a lower rate is through a hybrid loan, also known as an intermediate ARM. These have a fixed rate for the first three, five, seven or even 10 years, then convert to an ARM.
This might be attractive if you know you won’t have the home mortgage loan for more than five or 10 years.
Somewhat similar are balloon loans, which also have fixed interest rates for a set period of time. The rather big difference is that at the end this period the full balance of the loan is due.
When looking ahead to how your payments will change, consider all the possible scenarios. Of particular concern to buyers who are stretched financially is negative amortization, which happens when the principle balance grows over time.
FINDING A LENDER
You won’t have to look hard for someone to sell you a mortgage.
That much is for certain. Common “mortgage originators” include banks, savings and loans and mortgage bankers. You can even shop online, depending on your level of sophistication and confidence.
Another option is a mortgage broker, who acts as middleman between borrower and lender. This might be a good option for someone with less-than-stellar credit history, or for people who lack the time and desire to shop around.
The best way to build your home loan lender is to ask for referrals from friends, neighbors and professionals in related fields, such as real estate agents or lawyers. But don’t trust anyone blindly.
“Some mortgage professionals can help you with making the decision about what type of loan product you want, but it’s like going to a car dealer,” Tyson says. “Their financial incentives might not be aligned with yours.”
SOURCE: HamptonRoads.com