Buying a house is one of the biggest investments most people will make in their lives. It’s such an important decision and one that should never be taken lightly. When choosing a home (and a mortgage to fund it) it’s crucial that you choose the right one for you. Here are some points to bear in mind before signing on the dotted line.
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FHA Loan?
Most mortgage providers will require between ten and twenty percent deposit to be put down, with their loan covering the rest. For the average home, this will work out at around forty thousand dollars. If you don’t have this large sum for a deposit, you can look at a Federal Housing Administration (FHA) loan. This allows you to put as little as three and a half percent down. FHA loans can also help if you don’t have a perfect credit score. However, you will pay high mortgage insurance rates to protect the bank against default.
How Many Years?
Your mortgage payments, as well as the amount of interest you pay, is determined by how long your mortgage is. For example, a ten-year mortgage is paid off in half the time of a twenty-year mortgage so the monthly payment will be much higher. Most mortgages are based on a thirty-year amortization, meaning they are paid off in full after this time. If you want to pay off your mortgage early and have the means to do so, you could choose anything as low as five years. If you need more time and want lower payments (even though it will mean paying more interest over the life of the mortgage) it can be stretched out all the way to forty years.
Look Into The Total Cost
It can be sobering to see that borrowing $200k for thirty years can cost a whopping $38k in total, even at just five percent interest. Use a mortgage calculator to estimate payments and the total cost over the life of the mortgage. That way you go into it with your eyes open. It’s important to set a budget, so that when you’re looking at homes for sale, you know exactly what you can afford.
Fixed or Adjustable Interest Rate?
Fixed-rate loans are no longer priced at all-time lows so it can be tempting to go with an adjustable-rate mortgage. However, unless you plan on moving in the next five to seven years, you’ll be better off sticking with a fixed-rate mortgage. This is because the interest rate on a fixed-rate mortgage stays the same for the entire loan. With an adjustable mortgage, the rate remains fixed for a period of time. It then resets based on current interest rates. An adjustable rate might offer you a lower payment now, but it will eventually reset, most likely at a higher rate. This can leave you in a predicament financially if you’re not prepared for it.
There’s a lot to think about before taking out a mortgage. So the plan, do your research and shop around for the right deals for you.
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