Deciding to purchase a home is one of the most important financial decisions in an individual’s lifetime. While searching for the perfect home is the fun part, there are several steps to complete before evening beginning that search. What should you do before searching for homes online or taking any home tours? First and foremost, you should create a budget to determine what mortgage rate your budget can afford each month. Start by interviewing several mortgage lenders in your area. Determine their reputability through past reviews, and explain your financial situation – you’ll know when you’ve found the right one! The right lender will respect your financial situation and work hard to ensure you get the best rate. Once you have chosen a lender, he or she will run your credit and present you with options for what you qualify to borrow, your interest rate, and more! However, consider asking yourself these 10 questions before choosing a mortgage:
- What is the interest rate?
- Your interest rate is determined by loan and your credit score. If you do not like the interest rate, consider cleaning up your credit score. A lower credit score may mean a lower interest rate.
- What is the monthly mortgage payment?
- Ensure the monthly mortgage payment associated with your new home fits into your monthly budget. If it doesn’t, consider taking a smaller loan and purchasing a smaller home. You don’t want to risk your long-term or short-term financial goals.
- Is the mortgage fixed rate or an ARM?
- A fixed rate mortgage remains the same for the duration of your loan, while an ARM (adjustable-rate mortgage) is an interest rate that changes at intervals after an initial period. An ARM is a good option if you are not thinking about staying in the home long-term, as this loan tends to have a lower interest rate at the beginning. However, be sure to ask what your interest rate will increase to after the initial period.
- What fees do I have to pay?
- At closing, there is a one-time fee called “points.” Typically, for every point you pay your lender will decrease your interest rate by one percent. You can ask to pay zero at closing in exchange for a higher interest rate – be sure to ask your lender about this option.
- Does the loan have any prepayment penalties?
- In some cases, you may have to pay a fee for making some extra mortgage payments to try to pay off your mortgage principal sooner. Be sure to ask your lender if your loan will have this fee.
- When can I lock in the interest rate and points? And, how much does this cost?
- You may have the option to ask your lender to lock in an interest rate for a fee. This locked in interest rate will last for a certain amount of time. However, keep in mind, this could ensure that you benefit from a lower mortgage interest rate.
- What are the qualifying guidelines for this loan?
- Ensure your lender explains all the guidelines for the loan before committing. These guidelines include, but are not limited to, the following: income, reserve requirements, sufficient funds for a down payment, closing costs, proof of income, and six-month of mortgage payments saved.
- What is the minimum down payment required for this loan?
- The minimum down payment differs from loan to loan. However, most require a 20 percent down payment. If you do put down less than 10 percent, you will likely be required to pay a PMI (private mortgage insurance). However, if you qualify for an FHA loan, you can put down as little as 3.5 percent. Discuss these options with your lender before committing to a mortgage.
- Do I have to pay for mortgage insurance, and how much will this cost?
- If you put down less than 20 percent, you will be required to pay mortgage insurance until your loan-to-value ratio is below 80 percent. A PMI (private mortgage insurance) can be spendy, around $100/month for every $100,000 borrowed.
- Do you have other mortgage products with lower rates? Can I qualify for these?
- Ask you lender if they have any mortgage products with lower interest rates and if you can qualify for them. Chances are, your lender has already presented you with all the options. But, it doesn’t hurt to ask!
Do you have any questions about the mortgage process? I know several lenders in the greater Austin area and would be happy to provide you with their information!