Buying a home is exciting — so exciting in fact, that it can be easy to get caught off guard in the process. If this happens, you could get saddled with a bad mortgage loan, leaving you paying more money out of pocket every month and receiving less of a profit if you ever decide to sell.
To make sure you don’t get taken, you need to shop around and research not only your purchase, but also the type of credit and strategy you will be using to finance your buy.
This article will get you started by focusing on the basic points of home buying: down payment considerations, finding a lender, interest rates, loan options and creative financing.
Down payment considerations
Years ago, you needed to have anywhere from 10 to 20 percent down before you could qualify for a home loan. Times have definitely changed. Nowadays, you can finance up to 100 percent of your home purchase.
Now, this doesn’t mean that having a down payment is a bad idea, quite the contrary. A down payment will immediately knock down the amount you need to finance, and in turn, the amount of interest you will be required to pay during the life of your loan. Down payments will also provide you with a little cushion in case home values go down and you need to refinance or in the event that you need to sell quickly at a discounted price.
That said, it can be difficult to save up tens of thousands of dollars. It is also scary to completely drain your savings account right before you buy a home. If you need fast cash to make an emergency repair or to cover an unexpected bill, you might regret putting everything you had towards an unnecessary down payment.
In short, let your current financial situation and the amount of money you want to save in interest dictate how much money should be put down on your purchase. There are many different calculators online that can help you crunch the numbers. Your lender should also be able to help you in this capacity.
Finding a lender
Finding a lender is easy. Finding a good lender is not. There are a lot of slimy companies out there. Avoiding them will be the best thing you ever do. To do that, you will need to research your options.
You can start by asking friends or family members for referrals. You can also use the almighty Internet to dig up dirt on every lender in existence. At minimum, a good lender will have: quality customer service, a desire to get you the loan you need, a string of satisfied customers, and most importantly fair interest rates and loan terms.
The next step involves comparing lenders. You should contact at least three different lenders, making sure to ask each about interest rates, financing options, loan terms and closing costs.
Once you have all the above-mentioned information, it should be relatively simple to pick the lender who can best serve your needs.
Interest rates
If you have ever had a credit card or an auto loan, then you already know that interest is the price you pay for borrowing money. The lower your interest rate on your mortgage loan, the better off you will be. Even one or two percentage points can make a huge difference in your mortgage payment.
If your credit is a little shaky and you can’t get the type of interest rate you want, you can either take time to fix your credit or pay points when you close on the loan. Paying points on your loan will allow you to buy down your interest rate. Points must be paid upfront and are equal to 1 percent of the loan amount. The bonus in doing this (besides a lower rate) is that the points you pay are tax deductible.
Loan options
There are far too many mortgage loan options available to mention them all here. To keep things simple we’ll say that there are two basic types of mortgages: fixed rate mortgage and adjustable rate mortgages.
With a fixed rate mortgage, your rate never changes. An adjustable rate mortgage, on the other hand, has an interest rate that fluctuates with the index to which it’s tied. Each type of loan has its advantages, but neither is right for everyone. To get a handle on which is best for you, research each loan in detail, and if possible, seek advice from a loan officer or another financial professional.
Creative financing
Finally, this article wouldn’t be complete without mentioning creative financing. Creative financing encompasses interest only loans, piggyback loans, and other unconventional loan options. Creative financing has been getting a great deal of press as of late because of the large number of people who have gotten into trouble with these sorts of loans.
It should be understood that the loans themselves aren’t bad, but they are definitely not right for everyone. Creative financing should only be pursued if you are confident in your ability to make the required loan payments now and in the coming years. You should also be sure that you completely understand the way the loan works, the way you build equity, and what will happen if you fail to make your payments or if the housing market in your area takes a dive.
So doing a little bit of research in choosing the right lender will make that new home purchase seem that much sweeter!