First-Time Homebuyer’s Guide: Part 2
Find a perfect mortgage
You’ve chosen to make life’s biggest purchase. It wasn’t until you made the choice that you really thought about why you wanted to make it. Now that you’ve taken a deep dive into your personal finances, it’s on to the next step: finding your perfect mortgage. Among the very best assets you can have on your side during the home-buying process is the right home loan professional. The right person will be both knowledgeable and proactive, helping you find the right mortgage product and keeping you well informed throughout the home-buying process.
Finding the perfect mortgage expert
As you shop for a home loan with a low rate and full transparency, you should also shop for a loan officer (LO) who knows the industry, keeps you informed and treats you with respect. Below are the five qualities to look for during your preliminary research and conversation with a new LO:
- Patience—Does the LO listen to your questions and answer them completely?
- Knowledge—Does the LO know the rules, regulations, rates and the local market?
- Availability—Will the LO be accessible and responsive when you need consultation?
- Track Record—What do previous customers and colleagues have to say about the LO?
- Friendliness—Does the LO treat you with kindness, consideration and respect?
What mortgage is best for you?
When you provide your LO a complete picture of your current life situation and financial status, the home loan that’s best for you starts to become clear:
If you’re planning on living in your home for a shorter length of time because of a job transfer or expanding family, an adjustable rate mortgage (ARM) could be a good option. If you’re looking to establish roots and stay put for the long haul, a fixed rate mortgage is probably the best home loan choice.
Lower rate or lower monthly payment
When you work with your lender to find the perfect mortgage for your life situation, one important thing to consider is whether you prefer more money put toward home equity or more money on hand. With a lower rate, more funds are allocated to pay down the principal of the loan. With a lower monthly payment, more funds are available for everyday expenses.
One of the biggest financial barriers for homebuyers is coming up with enough cash for the down payment. One persistent myth is that 20% is needed, but this figure simply represents the threshold below which most lenders will require that you pay private mortgage insurance (PMI). In fact, the minimum down payment for a conventional loan is actually 3%. In general, a larger down payment means a lower monthly payment and fewer expenses.
Veteran or first-time homebuyer status
If you’re in either category or both, you could qualify for loan programs that aren’t available to other borrowers. Each status is important when looking for the best rate and mortgage product.
Determine your rate, payment and term
This step is where you get down to business regarding your rate, term and monthly payment. These are important elements to consider:
Lowest interest rate
- Pros: The lower the rate, the less you’ll spend on interest.
- Cons: A lower rate could mean a shorter loan term and thus higher monthly payments.
Lowest monthly payment
- Pros: Monthly payments are more manageable.
- Cons: More interest is accrued over the life of the loan and it takes longer to pay off.
Shortest loan term
- Pros: The shorter the term, the faster a loan is paid off. And, you could save significantly on interest.
- Cons: Monthly payments will be higher.
Fixed vs. ARM
Fixed rate mortgage
- Pros: The interest rate never changes over the life of the loan, providing you with a predictable monthly payment and protection from market fluctuations.
- Cons: The interest rate and monthly payment are typically higher than comparable adjustable rate products.
Adjustable rate mortgage (ARM)
- Pros: Over the fixed period, the interest rate and monthly payment are usually lower than comparable fixed rate products. Also, today’s ARMs are not nearly as volatile as those involved in the 2008 housing crisis because they have tighter caps on future rate increases.
- Cons: ARMs carry greater risk than fixed rate products. The interest rate could adjust and possibly increase after 5, 7 or 10 years, resulting in a higher monthly payment.
In next week’s First-Time Homebuyer’s Guide…