Few investments offer the tangible rewards of home ownership. But since your home will probably be the single largest purchase you’ll ever make, it pays to devote some time to shopping for the right mortgage. In today’s competitive interest rate environment, financing opportunities are plentiful — particularly if you are a low credit risk. So as lending institutions vie for your commitment, here is some information you need to know before signing on the dotted line:
Knowing your financing options
Many first-time home buyers choose FHA (Federal Housing Administration) or, if they are qualified veterans (Veterans Administration) mortgages. Since FHA financing requires as little as 5% down (including closing costs) and VA requires no down payment, they provide attractive ways to get into homes at reasonable initial costs.
Because conventional financing is backed by lending institutions rather than by government agencies, they require higher down payments — up to 20%. Most conventional financing also requires private mortgage insurance (PMI) if you put less than 20% down on your property. Despite PMI costs and higher down payment requirements, many buyers find conventional financing more competitive than government agency loans — particularly if they have already owned a home and have accumulated some equity.
Understand the costs. There is more to consider when choosing a mortgage than the interest rate. For example, some mortgages offer a lower rate in exchange for “points” (one point equals 1% of the mortgage). These costs are charged by the lender and are due at the time of closing. If you need a lower interest rate in order to qualify for a loan, a lender may let you buy down your rate by charging points up front.
You may also find that closing costs can vary from lender to lender. When mortgage shopping, be sure to get “good faith estimates” of loan costs from lenders so you can make sure you’re comparing apples to apples. Then you can assess loan types, interest rates, points, closing dates and lock-in periods (the length of time before closing that the lender will commit to the quoted rate).
Getting a mortgage on your terms
With the wide range of mortgage products now available, the key is to find the one that best meets your needs. You’ll have to choose between a fixed-rate or an adjustable-rate mortgage (often called an ARM) and then decide on a term.
The main factor in deciding what kind of mortgage is best for you is the length of time you plan to remain in your house. If you are buying a starter home and only plan to stay in it for a few years, consider an adjustable rate mortgage. Those buyers who plan to stay in their homes for 10 years or more would probably be better off with fixed-rate mortgages.
Gary N. Garner is a personal financial advisor with American Express Financial Advisors in Jackson.
With an ARM, instead of having a set interest rate over the term of the loan, the loan is adjusted periodically within a set range. The loan agreement will specify how frequently the adjustment will occur — usually somewhere between six months and seven years.
Fixed-rate loans are usually available in 15- and 30-year terms. You pay far less interest over the life of the loan with a 15-year term, but the payments are substantially higher. In addition, the certainty of a fixed-rate comes with a cost. You’ll usually find that the initial rate of interest is somewhat higher than with ARMs since the cost of money could be much higher a few years down the line.
Nothing is forever
While making a decision regarding a home mortgage is important, keep in mind that if your financial situation or interest rates change significantly, you can always refinance. With refinancing, it’s equally as important to do your math and weigh your options before making any decisions as it was when selecting your original mortgage.
Your current lender is usually the best place to start if you are looking at refinancing. If you have chosen an adjustable-rate mortgage and rates have dropped considerably since your last adjustment, you may be able to lower your interest by asking your lender to make the adjustment earlier than scheduled. Many are willing to make this modification for a small fee. Some are also willing to convert an adjustable-loan to a fixed-rate rate.
In any case, weigh the costs of refinancing against your projected savings over the period of time you plan to remain in your home. Then you can determine if the monthly savings are worth the overall refinancing costs.
Whether it be financing your first home or refinancing your existing home, a trusted advisor who is experienced in lending can be a valuable resource. Above all, don’t forget to ask plenty of questions and make sure you get straight answers.