Buying a home is a huge financial commitment. Finding the right mortgage with the best mortgage rate can be a confusing process, especially for first-time homebuyers. The best way to find out what will work best for you is to ask yourself — “What can I afford?” before doing your research and comparison shopping.
Here are five important questions to consider when deciding which mortgage is right for you:
- Fixed or Adjustable Rate? Mortgages generally come in two forms: fixed or adjustable rate. Fixed-rate mortgages lock you into a consistent interest rate that you’ll pay over the life of the loan. The interest rate on an adjustable-rate mortgage fluctuates over the life of the loan. An ARM usually begins with an introductory period of ten, seven, five or even one year, during which your interest rate holds steady. After that, your rate changes based on an interest rate chosen by the bank.
- Qualifications? Before you settle on a mortgage, find out if you’re eligible for any special programs that make home-buying less costly.
- VA loans: If you or your spouse are active military or veterans, you might qualify for a VA loan. Such loans allow low (or no) down payments and offer protections if you fall behind on your mortgage.
- FHA loans: Like VA loans, an FHA loan allows low down payments, but they’re open to most U.S. residents. They’re popular with first-time homebuyers, because they require as little as 3.5% down and are more forgiving of low credit scores than traditional lenders.
- USDA loans: If you live in a rural area, the USDA might give you a low- or no-down-payment mortgage and help cover closing costs. Like VA loans, USDA loans can also offer help if you fall behind on your payments.
- First-time homebuyer programs: If this is your first go-round in the homeownership process, do some research about homebuyer assistance programs in your state.
- Down Payment? Generally speaking, a lower down payment leads to a higher interest rate and paying more money overall. If you can, make a 20% down-payment of your home’s purchase price. If you don’t have the cash to do this, don’t worry. Many lenders will accept down payments as low as 5% of your home’s purchase price. However, low-down-payment loans often require private mortgage insurance, which means you’ll probably pay a higher interest rate.
- Closing Costs? Closing costs usually amount to about 3% of the purchase price of your home and are paid at the time you finalize the purchase of a house. Closing costs are made up of fees charged by lenders, including processing charges, title insurance fees and appraisal costs. Shopping for the right lender is a good way to find the best mortgage rate, and save money on a mortgage fees.
- Credit Score? Your credit score will help to determine whether you qualify for the loan and what rate you’ll pay on your loan. The higher your credit score, the lower your mortgage rate. According to myFICO.com, the best mortgage rates are available to borrowers who have credit scores of 760 or above. If you don’t meet the minimum credit score requirements, or if you want to improve your chances of getting the best rates, you’ll need to begin monitoring your credit scores
Photo/Reference Credit: bankrate.com, forbes.com