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 By
Debbie Wilson
Are you ready to make
your dream of owning a home a reality? There’s no doubt that choosing a
home is one of the biggest decisions you’ll ever have to make, and you want
to do it right! A house is a shelter, but a home is far more. It’s where
you live, relax, entertain, raise families, and work.
But how do you know if a house is THE one? And, how do
you go about financing that home once a decision to buy has been made?
First you will want to do your homework, then define your price range, and
finally choose a mortgage.
Getting down to business
Before you start actively house hunting, spend time
researching and analyzing the type of house you want and where you want to
live. Consider your minimum needs, such as number of bedrooms you require.
Do the houses you can afford satisfy those needs? You may want to partner
with a real estate agent who specializes in helping first-time buyers.
Speed is crucial in the entry-level home market, and good houses often sell
quickly.
A good realtor can also help you by:
·
Checking out different neighborhoods
·
Touring open houses
·
Learning about the school district
·
Talking to potential neighbors
·
Checking crime statistics
·
Viewing online homes
Let’s talk Money
Once you have narrowed your options, you’ll need to
ease your budget concerns by determining how much you can afford. This
process is usually referred to as the pre-approval process. Pre-approval
means you have a very good idea of how much you can borrow, what loan
programs will most likely work best in your situation, and how much home you
can afford. You may think that this step is a waste of time, especially
since pre-approval is not a loan commitment. But be assured that despite
fluctuating interest rates, pre-approval provides a reasoned, careful
analysis of what you can afford and allows lenders to items such as
appraisals and credit reports.
Mortgage hunting
After you have done your homework and defined your
price range, it is time to choose which mortgage is right for you. Home
loans come in many shapes and sizes. Deciding which loan makes the most
sense for your financial situation and goals means understanding the
benefits of each. Do you go with a fixed or variable rate? With so many
mortgage options available, choosing a home loan can be complicated and
time-consuming. But, whether you are buying a home or refinancing, there
are three basic types of home loans: fixed rate mortgage, adjustable
rate mortgage, and combination rate mortgage. There are different reasons
for choosing each. You may want to consider speaking with a mortgage
specialist who can help streamline the process for you by reviewing your
financial objectives and help pinpoint the mortgage to best achieve them.
Get A “Fix” On The Fixed Rate
In a fixed rate mortgage, the interest rate and monthly
payment remain the same for the entire term of the loan. Loan terms are
usually either 15 or 30 years and are the most widely accepted program used
to finance a residential purchase. A fixed rate mortgage works best if you
plan to:
·
Live in your home more than 5 years.
·
Like the stability of a fixed principle/interest payment
·
Think your income and spending will stay approximately the
same
·
Don’t want to run the risk of future monthly payment increases
Adjust Your Thinking With An ARM
An adjustable rate mortgage (ARM) is a mortgage loan
that is most widely known for its low starting interest rate (when compared
to the 30 or 15-year fixed mortgage loan). This “low” introductory rate is
used to calculate the mortgage payment for a specified period of time. Once
this introductory period is over, the interest rate is adjusted periodically
based on a pre-selected index. The most commonly used index is the yield on
the one-year Treasury bill. The new interest rate is determined by adding
this index to a set margin (which is determined by the lender). Although
there are a variety of adjustable rate mortgage programs available, the most
common program is the One Year Adjustable (one-year ARM). The interest rate
on the one-year ARM is adjusted once each year, for 30 years. APR’s on
variable rate loans are subject to increase or decrease from year-to-year,
however you should be prepared to handle an increase in your monthly
payment, should the index rate increase. An adjustable rate mortgage could
be your choice if:
·
You plan to stay in your home less than 5 years.
·
You don’t mind having monthly payment changes periodically.
·
You are comfortable with the risk of possible payment
increases in the future.
·
You think your income will probably increase in the future.
The Best of Both Worlds
A combination rate mortgage has a fixed monthly payment
for a short term, like 5 years, then moves to a variable rate for either a
specified term or adjusts on regular long-term intervals. You may want to
consider a combination rate mortgage if:
·
You want the stability of a fixed principle/interest payment
in the short term.
·
You want to repair your credit by demonstrating your ability
to make regular payments, then refinance for a lower interest rate.
·
You have a lot of consumer debt (combination loans are more
forgiving in this area).
·
You want to borrow more and get a lower monthly payment than a
standard fixed rate loan.
Taking the Plunge
Choosing and buying your home is one of the biggest
decisions you will make in your life. But don’t let that scare you! Before
you start actively house hunting, spend time researching and analyzing what
type of house you want and where you want to live. Find a real estate agent
who keeps close tabs on the market and can help you define your price
range. And most importantly, consider your current and future financial
circumstances and choose the option that suits your needs best. Remember,
the right kind of mortgage can make your dream of owning a home a reality!
About the Author
A freelance writer,
Debbie Wilson owns and operates a lakeside resort, managing all aspects and
operations including marketing and promotion. She also has experience in the
lending business with first, second, and refinanced mortgages. Her previous
experience includes management and profitability consulting for a national
healthcare company. In this capacity, she oversaw a five state operation,
utilizing her extensive knowledge of healthcare, billing, A/R management,
and human resources. Debbie holds a B.A. in Business Management with a
minor in Physical Education.
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