Buying a home is one of the biggest investments most of us will ever make. Before you go home shopping there are some things you can do that will make the experience less time consuming and disappointing.
First, find out how much mortgage you can afford. You should have a good feel for what kind of monthly payment you can meet comfortably but within that framework there is a lot of variables that can affect how much home you can buy.
1st Time Buyers and FICO
Your credit rating will affect the interest rate you can get on a mortgage. This rate will have a significant impact on your monthly payments. A good credit rating, for example a FICO score of over 680, could make you eligible for a zero down home loan. Financing more of the purchase price could allow you to get into a more expensive home.
There are downsides to a 100% or 100+% loans. The interest rates on these loans are generally higher than if you can put 10% or even 5% down. Also, because you don’t have any equity, you can’t really sell your home without losing money. So if you take out this type of loan keep in mind that you should plan on living in the same place for 5 to 10 years.
First time home buyers sometimes look at properties that need improvements. If you can do some work yourself, you increase the value of the home with your own labor. It might make sense to take out a large mortgage initially and invest money in improvements.
How long you plan on living in the home you purchase can influence what type of loan you take out. Conventionally mortgages were written for a fixed rate over 30 years. But over the last few years lenders have been getting more creative with loan terms.
Adjustable Rate Mortgages (ARM)
Adjustable rate mortgages or ARMs often have a low introductory rate that’s fixed for a certain period of time. That initial rate can apply for 1, 5, 7 or even 10 years. The initial rates are usually lower than a 30 year fixed rate. If you are pretty certain that you’ll sell your house within a few years, an adjustable rate might save you money.
If you know that you plan on staying in your home for a long time, fixed rate loans are usually a better deal over the long haul.
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