Buying a house — the thought of it either makes you squeak in excitement or tremble with anxiety. These reactions are pretty normal and expected. It’s because it probably is one of the largest purchases you will ever make.
When you’ve finally found the house you love, you’re just getting started. That’s just half of the battle. The other half is to know how to finance it.
If you have a fat bank account, that’s easy. You can make the purchase in cash, upfront and then the house is yours. However, if you’re not as financially blessed, you’d have to check on another good option — buying the property through a mortgage.
Will all the different types and kinds of mortgage programs out there, looking for the perfect one can be a headache. You may start by pooling only the best and most attractive programs out there. But even with that selected portion, there are still too many to choose from.
While there’s no “one size fits all” when it comes to home financing, there will certainly be that one mortgage that will fit you like a glove.
In finding a loan, you must take a look at your credit, debts, bills and other personal information. These things will affect the kind of mortgage you’ll be eligible for. But let’s say your credit is in good shape and you’ve handled your debts really well, how do you look for the right loan?
Choices. Choices. Choices.
You have many different choices. In order to pick the best one, you have to know the basics of each first:
Conventional Loan or Government-backed Mortgage?
Conventional loans are funded and guaranteed by commercial lenders and banks. Government-backed loans, on the other hand, are mortgages that are funded by a private lender or bank but are guaranteed by any federal government agency.
To qualify for conventional financing, borrowers typically need to have good credit. Because conventional loans aren’t guaranteed by the government, lenders are at a greater risk. To get a good conventional mortgage, a borrower must also shell out at least 20 percent down payment.
Government-backed loans usually have more relaxed lending requirements. People who couldn’t qualify for conventional loans but are deserving to receive financing usually apply for government-backed mortgages.
The three most common government-ensured housing programs are the FHA loans, VA loans, and the USDA loans.
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Fixed or Adjustable Interest?
Aside from choosing the right mortgage type, you will also have to decide what kind of interest rate will apply to the loan. You can either choose a fixed interest rate or an adjustable rate.
Fixed-rate loan’s interest rate will stay the same for the entire life of the loan. With a fixed interest rate, it is easier to budget your finances because you know how much you need to pay towards your mortgage each month. However, when market rates fall down drastically, you will still to pay the same rate which may be higher.
Adjustable-rate mortgages or ARMs, on the other hand, have rates that “adjust” or “reset” at specific points in time. They usually start at rates lower than that of fixed-rate mortgages, however, it will fluctuate based on some market indices. The low initial interest rate attracts many buyers because it allows them to save more money at the beginning of the loan term.
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Conforming or Non-conforming?
These terms may sound like jargons to you so let’s break them down into simpler terms.
Conforming loans are mortgages whose limits fall within standard guidelines set by government-sponsored enterprises or GSEs. Non-conforming loans, therefore, have loan sizes beyond these set loan limits.
Generally speaking, non-conforming loans may have higher interest rates because they are considered riskier than conforming loans. Borrowers also have to pay a higher down payment with non-conforming loans. However, these mortgages are made available for those whose purchase prices are beyond the given loan limit in the area. Individuals who take non-conforming mortgages like a jumbo loan must make sure they can afford this type of financing.
For 2018, the conforming loan limit for single unit homes in most areas in the U.S. is $453,100. Some areas that are considered high-cost may have higher loan limits.
These three basic questions will help you narrow down your search for the best home financing program. To learn more about specific home loans, a lender will be of great help. Shopping for a mortgage is easier if you connect with a trusted lender. They can help you find the best mortgage for you.
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