By: Gaurav Bhola, MSM, Managing EditorHome buying is an important process requiring research and time. In addition to trying to find the best home that meets you needs, finding the right mortgage loan is just as important. Before you start house hunting you need to do this:
- Determine your household budget and how much you can spend on a mortgage loan each month.
- Get free copies of your credit report.
- Get familiar with home loan financing options and associated variables, such as terms, interest rates, fees, points, etc.
After taking the above steps, here are the next steps to follow in your home financing quest.
1. Financing your Dream Home
Your home will most likely be your biggest financial investment. Home buying is a complex process that requires a methodical manageable process to make the home buying process simple. The best approach is to separate the various processes into manageable tasks. The following steps deal with discovering the best mortgage home loan options.
2. Know How much you can Afford
Before you begin your home buying journey, you should ascertain how much home you can afford. One of the steps you can take is to go to a mortgage broker or mortgage lender and get pre-qualified for a mortgage loan. Prequalification offers you the opportunity to focus on realistic price ranges that fit your budget. In order to prequalify for a mortgage you'll need to complete a home loan application which requires some information and documents that the mortgage lender can make you aware off. Also, review your credit report and ensure that all the information contained within is accurate.
3. Types of Mortgage Loans
The amount of house you can purchase depends on your mortgage home loan term and interest rate. The traditional terms for mortgages have been 15 or 30 years during which time payments are made. The mortgage rate can be fixed (the interest rate stays the same over the loan's term) or adjustable (rate fluctuates with market conditions).
By far, the most popular mortgage is the thirty-year fixed-rate. The longer term allows you to lower your monthly payment, whereas the fixed rate offers stability over the loan’s life span. These loans are perfect for individuals planning on living in their home for 7 years or longer. The downsides to 30 year mortgages are low principal payments in the beginning years, and the risk that mortgage rates will decline during the loan’s term. Nonetheless, If your credit score and credit history is good and you have adequate income, you can usually perform a mortgage refinance when mortgage rates decline.
Meanwhile, a 15-year fixed term lowers the interest rate, decreases total interest payments, and increases mortgage principal payments. The monthly payments are much higher than a 30 year fixed home loan because the term is shorter.
An adjustable rate mortgage (ARMs) might be worth looking into if you are looking to stay no more than three years in the home. ARMs provide initial interest rates lower than fixed rate mortgages. But usually after a year, rates are tied to the market and are subject to possible rate increases. Never get an adjustable rate mortgage if your income is unable to support interest rate increases in the future, thus enhancing your monthly payments.
4. Interest Rate Points
A mortgage point is interest that is paid in advance to lower the mortgage rate on a loan. One point is equal to 1% of the total mortgage amount. Usually, 1 point is worth 1/8 of 1% off the home loan rate. Points aren’t cheap; you have to make a decision whether it makes sense to pay extra for points.
Picking the right home loan mortgage financing that fits your unique financial needs is critical to your long-term financial success. Following the above tips will help guide you in making the right decisions about your mortgage loan.
