October 15, 2019
3 minute read
You’ve heard it before: buying a home is one of the biggest purchases you will make in your lifetime. And, you know it!
That’s why you spend hours searching online for homes in your desired neighborhoods. You research schools and Google your commute time. You might even do “Sunday brunch” in a different neighborhood each week until you find the right match.
But … how long do you spend understanding your budget and exploring mortgage options?
If you’re thinking about buying a home, follow these steps to determine the mortgage (and budget) that’s right for you in the long-term:
#1. Start by considering what you can afford
A great tool that you can use to determine how much you can afford to spend on a home is a mortgage calculator. It will take into account your annual income, your monthly expenses, how much you want to put towards a down payment, and more. You’ll also want to consider associated mortgage costs like closing fees, insurance, inspections, appraisals, etc.
Just remember, a calculator is just that — a calculator. Only you really know your true financial comfort level. And, just because a calculator (or your lender) says you qualify for a certain mortgage amount, you need to decide if that’s an amount you’re personally comfortable with paying.
#2. Examine your credit
Your credit plays a huge role in whether or not you will qualify for a mortgage and, from there, what your interest rate will be. Generally speaking, a higher credit score will result in a lower interest rate.
If you have less than ideal credit, you might want to spend some time improving it before taking the leap into homeownership, as small differences in interest rates can have big impacts over the course of a 30-year mortgage.
#3. Know your loan options
Next, consider your different loan options. The two main types of mortgages are conventional mortgages, which are guaranteed by a private lender or bank, and government-backed loans. Government-backed include FHA loans, which allow down payments as low as 3.5%; VA loans, which are only available to military service members and veterans and offer low or no down payments; and USDA loans, which cater to rural property buyers.
If you don’t have a lot of cash saved for a down payment but have a good credit score and a steady income, a government-backed loan can be a great option. On the other hand, if you have the ability to swing a larger down payment, you may consider a conventional loan.
#4. Understand fixed or adjustable rates
For budgeting purposes, knowing that you have a fixed payment each month can be a must-have for many buyers. A mortgage with a fixed-rate will remain constant throughout the life of a loan.
Adjustable-rate mortgages, on the other hand, have fluctuating rates or can reset at specific times. These generally begin with lower rates and then jump up when an initial term ends. If you’re not planning on staying in your home for a long time, this can sometimes be a good option.
#5. Compare lenders and estimates
Lastly, it’s important to remember that no two mortgages or mortgage companies are the same. Be sure to shop around and meet with lenders. It’s always in your best interest to explore your options and find the mortgage that’s right for you and your budget.