Buying a home is exciting — you tend to get carried away picking out color palettes, tiles and fixtures, and even new appliances like air conditioners and toasters even before your first home tour. There are so many decisions that come with finding a new home, but before you get carried away with all these new ideas, you have to remember that this is an investment choice.
You want to get the best rate possible so your chances of getting a good return on your investment are greater. There are many factors involved in calculating your rate. Knowing some best practices will help you get a better deal on your mortgage.
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What Type of Mortgage Should You Get?
You can get a fixed rate or an adjustable rate when you take out a mortgage. This simply means with a fixed-rate mortgage, you will pay a consistent interest rate until the loan is paid off. With an adjustable rate, also known as an ARM, your interest rate will change.
The ARM offers a lower interest rate in the beginning. You will get a period of 1 to 10 years to enjoy that rate before it goes up, which causes your monthly payment to increase as well.
If you are OK with your monthly payment increasing after the introductory period or if your introductory period is long enough that you will have the loan paid off by then, the ARM may be the better option.
As long as you look at the whole picture across both mortgage types and are aware of how getting an ARM will change your monthly payment in the future, you should be able to make a good decision to get the right type of loan.
The Down Payment
How much should you plan to put down on your home? Ten percent? Fifteen percent? More? This is a good question and a big part of preparing to get a mortgage.
The answer isn’t a simple percentage that applies to everyone, though. The sale price of the house and the type of loan you are taking affects down payment requirements and recommendations. For the sake of planning, use a down payment calculator to get a ballpark range of what you can expect.
Don’t just assume putting down more money will always be the best choice. There are other ways you can use the money that may make more sense in the long run, such as buying points or investing.
Many people may wonder if it’s better to put down more money on their house up front or invest that money and let it grow to give them more to pay on the loan later. Since all situations are different, you should evaluate your circumstances and discuss your options with your financial advisor.
What About Points?
You have the option to pay to reduce your interest rate. You pay 1 percent of the mortgage amount (a point), and that amount reduces your interest rate over the life of the loan. The amount of interest savings is usually 0.25 percent.
If your interest rate is 5.125 percent on a $200,000 loan, you’d pay $2,000 for one point to get your interest rate down to 4.875%. It doesn’t sound like much now, but it could save you $9,000.70 over a 30-year loan.
The goal is to at least break even, so you should calculate the break-even point by dividing the cost of the point by the savings you’ll reap each month. This will give you the number of months it will take to get back the investment for the point(s).
You will want to consider how long you are planning on paying on the loan to determine if the investment in points will pay off for your situation. If you are getting an ARM, you also should determine how your loan will change once your introductory period is over.
All of these things come into play in helping you make the best investment decision and get the best rate possible for your mortgage. If possible, work with a mortgage expert who can help you look at all of your options so you save money and get the best possible rate.
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