The decision whether to rent or purchase a home is complicated and deserves a lot of careful consideration. Once someone decides to purchase a home, the questions only become more difficult when the need for a mortgage arises. Very few people can afford to purchase a home outright, so the vast majority of individuals will need to secure a mortgage. However, many people do not understand the basics of borrowing such a large amount of money and the questions to ask when shopping for a loan. Below is an outline of the most important points to keep in mind as you begin your search for the best mortgage.
Mortgage rates change rapidly.
Many individuals are under the impression that mortgage rates are generally stable. However, just as stocks rise and fall over any period of time, mortgage rates change daily. A quote that someone receives at 9 a.m. many no longer be valid come later that same afternoon. In general, rates have been very low, so shoppers have paid little attention to fluctuations in the market. However, it is important to keep in mind that a quote that seems unreasonably high may be due to a sudden peak in the rates. Waiting a couple of days, or even a couple of hours, can result in a better deal. At the same time, when you come across a rate that you find particularly favorable, it’s important to lock it down quickly or risk losing it altogether.
APR speaks to the cost of the mortgage, but it is not the whole story.
The term APR stands for annual percentage rate. This rate has a major impact on the cost of a loan, but you should take other factors into consideration as well. APR represents the interest you’ll pay on your loan each year, but there are also origination fees, mortgage points, and closing costs. Lenders that seem to have lower rates often end up costing more once these fees are factored into the overall cost. While federal regulators have paid more attention to the mortgage industry lately, there are still no regulations that require lenders to offer the same rates or charge the same fees.
Borrowers who take the time to investigate fees can put themselves in a much better situation in the long run. You can also save money by negotiating for the seller to pay the closing costs, or the lender. While most lenders will agree to pay the costs, they will typically increase the APR. Still, in certain situations this approach can save money. Individuals may also be able to take advantage of government initiatives, such as first-time buyer programs, to cover closing costs.
Traditional mortgage requirements do not necessarily apply.
A large number of would-be homeowners are discouraged by the strict requirements that mortgages entail. In reality, many of these requirements can be sidestepped. For example, most borrowers assume that lenders always require 20 percent down for a loan. However, people who have great credit can typically qualify for loans with much lower down payments, and some options demand only about 3.5 percent down. Some mortgages backed by the Department of Veterans Affairs, Federal Housing Administration, and the Department of Agriculture do not require any down payment at all. In addition, so-called piggyback mortgages only require a 10 percent down payment. So if you cannot afford to put 20 percent down, this does not mean that a mortgage is necessarily out of your reach.
Other people may be discouraged by the requirement for a two-year employment history. Most loan officers will say that at least two years of work history is required, but that is not always true. For example, someone who started as an unpaid intern can often use that time to count toward the two years. Furthermore, people with certain traditionally “stable” jobs may get approval without a two-year history. In the end, you should always ask questions and explain your situation. Often, an agreement can be reached.
Options exist for people who do not have perfect credit.
Typically, people without a great credit score resign themselves to renting, but a number of options and programs exist for people in this situation. While you will need a good credit score to qualify for most advertised rates, it does not hurt to go through the pre-approval process and see if a deal can be made. Traditional lenders may be willing to work with people who do not have great credit, but the interest rates may be prohibitive.
Still, a number of other options exist. For example, the Federal Housing Administration will ensure mortgages for borrowers with no credit history or scores as low at 500, which makes applicants more appealing to lenders. In addition, Fannie Mae and Freddie Mac will approve people with FICO scores as low as 620. The US Department of Agriculture and Department of Veterans Affairs also have special programs for people with lower credit scores.
Adjustable rate loans add an additional layer of risk.
Sometimes, people are attracted to adjustable rate loans because they start at a rate significantly lower than the fixed rate. However, these rates can quickly rise much higher than a fixed rate loan and cause major issues down the line. These sorts of loans should only be considered in very specific cases. For example, if the loan ceiling on the adjustable rate is below the fixed rate, then you will save money on the loan over the long run. Individuals who plan to sell their home before the first rate adjustment could also opt for these loans.