Home Purchase Loans
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Preparing to Purchase a Home
Make sure you can answer the following: How much can I afford to pay monthly for my mortgage loan? What will I need for closing costs? Finally, will I have enough to cover home-related repairs and necessities such as furniture and utilities?
As a buyer, you must know your rights. You’re entitled to shop for the best loan for your individual financial situation, and to compare the fees assessed by different mortgage brokers and lenders. You also have the right to a credit decision that is not based on race, color, religion, national origin, sex, material status, age, or whether any of your income is from public assistance.
Avoid First-Time Home Buyer Mistakes
You can simplify the home purchase process by avoiding errors commonly made by first-time buyers. First, find the best professionals to assist you with your home purchase and mortgage loan. When seeking both the right real estate agent and lender, get referrals from trusted family members and friends.
A good real estate agent will show you many homes that fall within your price range and other parameters, while the right mortgage banker will be ready, willing, and well-informed enough to guide you through the new home loan process. Both should be open to any questions you might have and able to provide thorough, understandable answers. They should be both accessible and responsive, as well as thorough enough to understand your personal financial situation before seeking the right mortgage product for you. Also, you should feel at ease with your agent and mortgage banker, and never be pressured into a situation that is ill-fitting to your needs.
Make sure to check your credit report as well as your FICO score before going shopping for a mortgage loan. The stronger your score, the better your interest rate and terms on your new home loan. Federal law now allows consumers to receive a free copy of their credit report once every 12 months; you can get yours by visiting www.annualcreditreport.com.
When applying for a mortgage, you’ll need to gather documents including your signed purchase agreement, copies of your W-2 forms, proof of income and assets, a copy of your earnest money deposit, and a copy of your homeowner’s insurance. Though there are quite flexible loans available with little documentation, the more paperwork you can provide, the better the interest rate you’ll get on your loan.
Many first-time buyers fail to make their offer enticing to the seller, so due diligence is key. Your real estate agent will provide you with a list of comparable homes that have sold recently, and from this list you can deduce a price range. Other factors that will determine your offer on a potential home purchase include: the home’s condition, current market conditions, and finally, your own threshold in terms of how much you’re willing to pay.
Look At Your Home Loan Options
There are three basic types of mortgage loans: fixed-rate, adjustable-rate, and interest-only. Fixed-rate loans offer a fixed interest rate throughout the life of the loan and are most commonly available with 15- and 30-year terms. Since your new home loan balance is amortized over the loan’s life, your payment stays stable.
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Adjustable-rate mortgage loans are typically of shorter duration, with terms of one, three, five, or seven years. These loans also offer lower initial rates for that first chunk of time, after which it generally adjusts yearly within a two percent cap and can either increase or decrease according to market conditions. Unlike the stability offered by a fixed-rate loan, ARMs are best suited to those more comfortable with risk as you can’t predict whether your rate will go up or down.
Interest-only mortgages allow borrowers to make payments that cover just the loan’s interest, significantly lowering payments. However, this only lasts for a specific amount of time, after which your monthly mortgage payment will increase.
You may also run across terms such as balloon financing — which refers to a loan that requires a single, usually final, payment that is far greater than the payment preceding it — and home equity loans, which is a fixed or adjustable-rate mortgage loan secured by the equity in your home.
Also, remember to research points, rates, and fees related to your new home loan, as these will need to be paid as closing costs. Purchase points, also known as discount points, are an up-front fee that is paid to the lender in order to lower your interest rate over the life of the loan. Your interest rate is the fee a lender is charging you to use their money for your new home purchase, while other associated fees cover the costs of processing and underwriting your mortgage. You may also hear about private mortgage insurance, or PMI, which is borrower-purchased insurance that covers the lender against default.
Homeownership offers substantial financial and tax benefits. Interest paid on a mortgage loan is usually tax-deductible, as are discount points. Additionally, the more principal you pay on your home loan, the more equity you have. Finally, there is the satisfaction of owning your own home, as opposed to renting someone else’s property. With research and preparation, your new home purchase can be a success.