The Right Path to Home Ownership
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!
