Buying a home is one of the biggest financial moves people make, both in lifestyle and long-term financial planning. And one of the most important steps in buying a home is getting the right home loan. Taking these five steps can help ensure you make a great decision.
Know what’s out there
There are many different mortgage options available, and they vary in terms of loan type, interest rate, and the length of the loan.
Conventional loans come directly from a financial institution. Federal Housing Administration loans or FHA loans are available for people with lower credit scores and often require a smaller down payment. There are also loans available through programs like the Veterans Administration or the U.S. Department of Agriculture.
Loans also feature either adjustable interest rate or a fixed interest rate. An adjustable interest rate mortgage can be low initially, but can fluctuate throughout the course of the loan, so your mortgage payment can go up or down regularly. With a fixed rate mortgage, you “lock in” at a specific rate and your payments stay the same for the life of the loan. The life of the loan is known as the loan term, which typically is 15 years or 30 years. A 15-year mortgage allows you to pay the loan off sooner, but your monthly payment will be higher than with a 30-year mortgage. A 30-year mortgage will offer lower monthly payments, but you pay more interest on the loan over time.
Keep in mind that with any loan you choose you will likely have opportunities to refinance as the market interest rates and the value of your home change. Mortgages with adjustable interest rates can be converted to fixed interest rates, and vice versa. The term of the loan can also be changed when you refinance. Interest rates may drop throughout the course of the loan you can refinance to create lower monthly payments, if it makes financial sense.
Assess your own situation
Once you understand your options, the next step is to consider your current situation and what factors will impact your home loan decision, both personally and financially. Where are you in your career path? How long do you plan to be in the home you buy? Are you in a position to make a regular mortgage payment? How much do you have in additional debt, and how is your credit?
These questions can help you determine how much money you want to borrow for a home loan, and how much you will qualify for from lenders.
Compare apples to apples
As you are considering loan options, make sure you look at all parts of the loan holistically. There are obvious things to compare: The type of loan, interest rate, and loan term. But there are other factors that can add to or take away from the overall offer. For example, points are fees that you pay up front when you get your loan to lower the interest rate and decrease payments over the course of the loan.
Loans also come with closing costs, which vary based on your lender and where you live. Closing costs generally are a percentage of your loan amount, and cover costs associated with the loan application or origination fee, loan underwriting fee, home appraisal fee, title insurance, yield-spread premium, and credit report fee.
There is also the cost of private mortgage insurance (known as PMI), which is mandatory on a mortgage unless you have more than 20% of the down payment. Mortgage insurance is required and must paid until you have enough 20% equity in the home. This insurance protects the bank’s portion of the loan if for any reason you are not able to pay the mortgage.
When evaluating your options, it’s important to have a solid understanding of what each bank is offering. Then knowing how it will impact not only what’s due at signing, but also your monthly payment. Mortgage lenders are required to provide a loan estimate after they receive your application, and this form lists details on the interest rate, payments, and monthly closing costs. All lenders must use the same form, which can help. Still, savings in one area can show up as an expense in another area. Reviewing all your loan options carefully is an essential step.
Once you decide on the ideal home loan and lender, you can move to next steps on the path to home ownership. This can involve getting pre-approvals on a loan or moving on to accepting a loan offer. From there it can take 30 to 45 days for a loan to close. At that point, you go to the loan closing, where you review and sign all the home loan documents. This can be daunting, but exciting. The loan will be officially in effect, but you can feel confident that you chose a good product from a quality institution. Now it’s time to move in and unpack!
Buying a home or investing in real estate can be a smart financial move. Still it is one of the biggest most important financial decisions people can make. By investing in the right home loan, you can make the most of your money and earn equity that can provide big payoffs down the road.
At Guaranty Bank, we are happy to always answer any questions that you may have about buying a new home and taking out a mortgage. Contact one of our Mortgage Loan Officers to schedule an appointment!