Buying a home for the first time is an exciting endeavor, but it’s also a huge financial decision. The median home value was $205,100 as of November 2017 according to Zillow. Unfortunately, most of us don’t have that kind of cash on hand, so that’s where home loans come in.
The process of choosing, applying for and obtaining a mortgage can be overwhelming, though, especially for first-time homebuyers. It’s easy to get lost in the paperwork, financial terminology and types of loans, which is why it’s important to have an experienced professional to guide you to the best loan for you.
There are an array of loan programs that exist and can fit the various needs and desires of homebuyers. Every homebuyer situation is unique and there is no one size fits all when it comes to homeownership financing. A lender can help you explore mortgage options to help you make the best financing decision for your situation.
Before you decide on a loan, you should first identify your goals and determine how much home your budget can handle. Knowing where homeownership fits into your larger financial plan is important. Reflect on where your life is headed and what you want to accomplish along the way.
Some questions to ask yourself:
• Would I need to make changes in my budget to buy a home?
• Will buying a home mean stretching to my financial limits?
• Would owning allow me to maintain my other savings goals and be prepared for potential home emergencies, like a new roof?
• What’s more important to me: the opportunity to build equity over time or have stable housing payments?
The types of loans available to you will also depend on a number of factors, such as your credit profile, down payment amounts and income. Here’s a breakdown of some of the most popular types of home mortgages available to first-time homebuyers:
1. Fixed-Rate Mortgages
These types of mortgages have a set interest rate for the entire life of the life, typically 15 or 30 years, which means your monthly principal and interest payments will always be the same. This offers you consistency that can help make it easier for you to set a budget.
This type of loan is great if:
• You plan on owning your home for an extended time period (7 or more years).
• Interest rates are likely to rise in the near future and you want to lock down the current rate.
• You prefer the stability of a fixed principal and interest payment.
2. Adjustable-Rate Mortgages (ARMs)
ARMs are loans with interest rates that adjust at a specific time and frequency (once a year, once every three years, etc.), so the amount you pay changes depending on the market. Typically, they provide a lower initial rate than fixed loans and after the first period is over, the rate will adjust to the market trends. This type of mortgage is generally considered riskier because your future payments are not guaranteed.
You may choose this type of loan if:
• You want to take advantage of lower initial payments to buy a more expensive home.
• You believe the market rates will decrease in the future.
• You expect to sell your home in a set time frame and therefore will move before you experience an interest rate change.
3. Government Loans
In addition to private loans, there are also government-backed mortgages available, such as a FHA loan or a VA loan.
A FHA loan is a mortgage insured by the Federal Housing Administration. They usually offer competitive interest rates, smaller down payments and lower closing costs than many private mortgages. These loans are especially popular amongst first-time homebuyers because, if you have a credit score about 580, you may qualify for a down payment as low as 3.5 percent of the purchase price. However, you must also pay mortgage insurance premiums, which protect the lender if you default.
If you are an active-duty military member, veteran or surviving spouse, you may have access for a loan through the U.S. Department of Veterans Affairs. Since the VA guarantees part of the loan, these loans usually feature competitive interest rates and no down payments. You also don’t need to meet a minimum credit score and aren’t required to pay private mortgage insurance.
A final note: Beware of lenders that promise the moon; a good rule-of-thumb is that if it sounds too good to be true, it probably is. Your best best is to consult with a local, licensed mortgage loan officer who will meet with you and be available to guide you through the home-buying process.
Still have questions about the home loan process? Team Tumminia will be happy to help!