One of the most vital parts of manifest destiny and the American dream is home ownership. Owning your own home can be a very smart investment choice since prices tend to increase quicker than the inflation rate, and now, with the recession dropping home prices and interest rates to their lowest in the last decade, there isn’t a better time to buy! Because of the current market timing and the fact that it’s a widely known as a smart investment, now is the time to start considering the thought. Before you rush out, call a realtor and start looking for a house, you should start by seeking out the perfect mortgage for your budget.
All potential homeowners should take some time to research home loans before calling their local Realtor. There are a dazzling array of choices available when it comes to home loans, and finding the right mortgage for your needs can be hard. Approach your upcoming home buy with the same seriousness you apply to other major buys. Your home will most likely be the largest single investment you ever make. Take the time at the beginning to educate yourself about home loans. It will be time well spent.
Start your research with your local mortgage brokers, banks, and credit unions. Make sure you’re comfortable talking with the broker, and he or she is able to spend a small extra time with you to educate you. At the same time you’re looking for the right ‘person,’ you also don’t want to get stuck with an expensive loan, so do some price shopping to compare rates and fees as well.
Adjustable (variable) rate mortgages (ARMs) and fixed rate mortgages are the two main types that you’ll be looking at. The ARM will typically be a less expensive rate since it ‘adjusts’ to whatever the current market rate is after a certain period of time. ARMs with below-market rates are sometimes used as a promotional tool, and after a very small term your rate could skyrocket to much higher than you should be paying. Make sure you get the facts before your sign.
ARMs have two specific things you look for to use in your analysis – when the rate adjusts (anywhere between one month to 10 years) and what the cap on the interest rate is. Usually, the rate will adjust to whatever the prime rate (the federal government chooses this number) is at the time of the adjustment, plus a certain percentage of ‘mark-up’ that pays the bank. When you learn the rate cap, use a mortgage payment calculator to find out how much your maximum monthly payment is, worst case. That’s not to say your mortgage will really adjust to that rate, but it’s a prudent thought to plot for different scenarios – including worst case.
Currently, interest rates are very low because of the recession, and by getting into and adjustable rate right now, you’re setting yourself up to more than likely be paying a higher rate later when the fed raises the prime rate. Since mortgage companies know this, they’re offering even lower rates to give you an incentive to get into an ARM. If the rate is set to adjust after, say, 5 years, but you only plot on staying in that house for 2 or 3, it might be an brilliant thought to take advantage of that rate, then pay off the mortgage when you sell your home before the intro rate expires.
Instead of an ARM, you might consider a fixed rate mortgage. Having a fixed rate means you have a guaranteed rate for the life of your loan – you’ll never have to pay more than the monthly payment set at the beginning. Of course, if rates drop, you can take advantage of it by refinancing with the new APR. Since rates are extremely low right now, a fixed rate looks like an brilliant bargain.
Your mortgage term, or length, is another deciding factor of how much interest you’ll end up paying. With a longer term, you’ll pay more interest since your loan is amortized over more years – making more compound interest. If you need the flexibility to make smaller payments by taking on a longer mortgage term, you can always pay more toward your principal at any time to help reduce the length of the loan. Just by paying a few extra principal payments/year can save you tens of thousands of dollars in interest!
Whatever type of home loan you choose on, the most vital thing is to take that step which transforms you from a mere renter to a home owner and builder of equity. There are a fantastic many home loans out there, but once you find the right one, you will find the rewards of home ownership well worth the time and effort place forth.