Owning your own home… it’s part of the American Dream. Whether you want a large yard with a white picket fence or a condo in the center of downtown, you’ve got to pay for it, and this is generally done through a home mortgage. Mortgages can seem daunting…so much paperwork, signatures, and amortization schedules.
To make it easier, we have come up with a few basic rules to follow.
- Figure out what you can realistically afford. Lenders will offer to do this for you, but often what they say you can afford (solely based on income) and what you can actually afford are quite different. Only you know where the majority of your paycheck goes each month, and, unless you want to never eat out, put money aside for a children’s college fund, or save for retirement, it’s best to figure out your housing budget on your own.
- Clean up your credit. The largest factors mortgage lenders look at before giving you a home loan are your credit score and credit history. This helps them determine if you are a risky borrower. Before you apply for a mortgage, check your credit score and set a plan to improve it, if need be. Pay off credit card balances to free up available credit. Lenders will prefer you as a borrower if you are using less than 30% of your available credit. Also, avoid opening any new accounts or making any large purchases while you’re in the process of getting a mortgage.
- Choose the right mortgage for you. Fixed rate or adjustable? 30-year term or 15? The options can be dizzying. The most common mortgage is a fixed rate, 30-year loan. This is great if you want to lock in your rate while they are low. Adjustable rate mortgages (ARM) will have a fixed rate for a set number of years up front, ranging from 1-7 commonly, and then the rate will rise or fall for the remainder of your term, based on market rates. ARMs can be a good idea if you plan to sell or refinance before the initial rate expires, because these initial rate are often lower than those for fixed rate mortgages. When it comes to the length of your loan, it ultimately comes down to monthly payments. 15 year mortgages may carry a lower interest rate, but the monthly payments will be higher, as you are paying off your home in half the time. 30-year mortgages may carry a slightly higher interest rate, but the monthly payments will be lower. Plus, you can always pay more each month to cut down your premium and pay off your mortgage faster. Ultimately, the choice is yours but be sure to evaluate your options.
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