The single most important aspect of your home purchase is the loan, or mortgage, you obtain. The amount of this loan will be decided by the price of the home and your down payment.
Generally, the amount of your down payment and income/debts control the price range of homes you can look for, and hence, the size of the loan you will need.
A lender will analyze your income to determine your ability to repay the loan. A general rule of thumb to calculate how much loan payment you can handle is to figure 25-33 percent of your gross, pre-tax monthly income.
The interest rate and the principle amount of the mortgage will determine the amount of your monthly payments. The higher the interest rate, the higher the monthly payments. The length of most real estate loans is generally 15 or 30 years. Loans fall into two basic categories: (1) those that have fixed interest rates and payments; and (2) those with interest rates and payments that vary over time.
A Fixed Rate Mortgage provides a known monthly payment that will remain the same throughout the life of the loan. This means housing costs will never vary and will be easy on the budget. The interest rates on these loans are usually a little bit higher than on adjustable loans since the lender is establishing a set interest for a number of years.
Adjustable Rate Mortgage (ARM) loans generally give the benefit of low initial interest rates and a corresponding lower monthly payment at the beginning of the loan term. The rates increase (or may even decrease) as the loan provides for periodic changes in interest rates. An important point to look for is the presence or absence of interest rate "caps." Life-of-the-loan caps place a ceiling on how high the rate can go over the term of the loan, often five to six percentage points above the original rate. They are a guarantee from the lender that you will not be required to pay more than the agreed-upon maximum interest rate. Annual caps protect you from extreme jumps in the interest rate in any given year and are usually in the one to two percent range.
Shop around for your loan. Don't be afraid to ask questions and to compare one loan to another. Since you will be living with it for many years, make sure to get the one best suited to fit your financial circumstances.
Find a Loan
Look at loan programs and rates offered by several different lenders. If you find a lender that offers a 6.25 percent rate when all the others charge more, you'll save in interest over the life of a 30-year loan.
Comparison-shop online to cut your search time drastically. Work with a mortgage broker who arranges loans from many different institutions. Choosing a mortgage can take weeks if you contact several lenders yourself.
Be sure to compare loans thoroughly:
- Compare at least 6 lenders or mortgage brokers. One of them is bound to offer the loan that's best for you.
It not all about interest rates. Getting a low rate is important, but you won't benefit from it if you have to pay too many up-front points and other fees.
Understand how points and rates work. A point is prepaid interest, and each point you pay equals one percent of your loan amount. If you get a $100,000 loan and pay 3 points, that's $3,000 in points. The more points you pay, the lower the rate you'll get.
How long will you keep the loan. If you're going to move in a few years, consider an adjustable-rate mortgage since you may be able to sell the house before the rate gets too high. If you plan to stay longer, a fixed-rate mortgage may be an attractive option because your rate stays fixed for the term of the loan.
Get a Loan
When you submit your loan application online or in person, your lender combines the information on your application, the results of your credit report, the information about the property you want to buy, and your proposed down payment to estimate your ability to pay the money back.
If you have already gotten qualified for the mortgage, the lender may be able to approve the application and complete the loan within a couple of weeks. Otherwise, loan approval can take a month or two.
To improve your chances of loan approval:
- Fill out the loan application completely. The lender needs all this information to determine your creditworthiness.
Respond promptly. Don't put off responding to lender requests for additional documentation. Get the documents yourself and hand-deliver them.
Don't go on a spending spree. Before the sale is scheduled to close, the lender may check your credit report for high credit card balances and your bank accounts to make sure you haven't drained them.
Make sure the appraisal is done properly. The lender will order an appraisal of the home to ensure that you don't pay too much. If the appraisal is too low, you can fight the report to prevent the transaction from falling through.