The idea of purchasing your first home can be daunting. You get advice from everywhere – your friends, parents, realtors, loan officers, and others. Much of that information will be valuable. You should, however, also remember that any advice you receive comes through the filter of the person giving it. What is best for them, may not be best for you.
There are three common assumptions people have about home financing. When you get serious about buying your first home, it’s best that you don’t accept these assumptions at face value. Take the time to learn if they really apply to you.
Assumption #1: “You’re Not Going To Be Able To Get A Mortgage Without A Huge Down Payment.”
True, many conventional mortgages will require a pretty substantial down payment. With today’s prices, the down payment can be a huge chunk of change to accumulate. Good news! You have options.
Loan programs from the Federal Housing Administration (FHA) and Veterans Administration (VA) are examples of loans that may be available to you. These loans require a much smaller down payment. It’s worth learning if these are options for you.
You can also obtain a mortgage with a lower down payment if you are willing to pay private mortgage insurance (or PMI). This insurance premium is added to your payment and protects the value of your home for the lender in case you stop making payments. PMI is an option if you can’t wait to save the down payment but can afford to pay more each month.
Many lenders also will offer special programs for first-time homebuyers that waive some of the stringent down payment requirements of a conventional mortgage. For example, consider Genisys Credit Union’s first time home buyer program. With this option, you can put less down without having to pay mortgage insurance.
Assumption #2: “You Have To Get A 30-Year Fixed Rate Loan.”
The 30 year fixed rate loan has been the staple of American home financing for years. With a fixed rate loan, you have the security of knowing what your payment will be for the entire term of your mortgage. If market interest rates rise, your rate will not. If interest rates drop, yours will stay the same, and you may still have the option of refinancing to a lower rate loan.
However, adjustable rate mortgages (ARMs) are still worth considering, especially for a first-time buyer. An ARM’s interest rate will adjust at certain points of your loan term based on the movement in general market interest rates. ARMs are usually indexed to a single market rate that you can easily follow. If interest rates go up, your mortgage rate will go up. If they go down, your mortgage rate will go down.
This flexibility in rate is what makes many borrowers nervous. The rate adjustment may change your payment or lengthen the time it will take to pay off your loan. That’s pretty scary, but only if you don’t know all the facts.
Many ARMs fix the rate for a period before it can reprice. There may also be limits to how much a rate can adjust.
Looking at the Genisys first mortgage program again as an example, you will find that the initial rate is locked in for a period of time that may be longer than you plan to stay in the house. That rate is usually lower than what you can get on a 30 year fixed rate loan. If you are certain that you will not be staying in your first home for more than the initial fixed rate period, an ARM can be a more affordable option.
Assumption #3: “You Have To Get A 30-Year Fixed Rate Loan.”
Wait a second. Isn’t that the same as Assumption #2? It is, but for a different reason.
One of the best things you can do for your long-term financial health is to pay your mortgage as quickly as you can. Many borrowers will take out a 30-year loan and then make extra payments to pay down their principal more quickly. This approach provides the flexibility to drop down to the regular payment if a change in income makes the larger payment difficult to continue. This can be a good strategy, but there is a cost.
If you can afford the payment of a shorter term, the interest savings will benefit you in the long run. Not only will you pay less interest because you’re paying over less time, but the rate charged on your loan will be lower. Have your mortgage consultant run the numbers to determine if this is an option for you or compare using the Mortgage Payment Calculator.
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