First time home buyers often feel uncomfortable at the thought of taking on a mortgage. It is a huge undertaking, make no mistake, but it does not have to be so scary and overwhelming. If you are planning on getting a mortgage, it will make the entire process a lot easier to cope with if you spend some time researching information about mortgages and buying a home. Below are a few answers to some frequently asked questions about mortgage basics.
What kind of lender should you choose?
When you start researching lenders, it is tempting to choose the one that offers you the lowest rates. However, there is more too it than that and being in too much of a hurry to choose a lender can end up with you saddled with a mortgage that is simply not suitable for you.
Typically, you can choose between a bank, similar conventional lender, and a mortgage broker. If you go with a mortgage banker, you know exactly what you are getting, and that can make getting a mortgage more comfortable for a first-time buyer. On the other hand, if you choose to work with a mortgage broker, you have a better chance of getting exactly the kind of mortgage you want, as brokers offer a much larger variety of mortgage products than banks do. Be aware, however, that in many states mortgage brokering is not a licensed profession, so it is important to check out broker’s credentials before you work with one.
How do lenders assess your level of risk?
When mortgage lenders assess the level of risk involved in giving you a mortgage, they look at two different factors: your ability to pay, and your willingness to pay. Your ability to pay is determined by examining your income-to-debt ratio, which is simply a measure of your income versus your debt level. Your willingness to pay is based mostly off your credit score, as this score is a representation of your history in terms of paying debts.
To most lenders, the ideal mortgage applicant has an income-to-debt ratio of around thirty-six percent, and a credit score of at least seven hundred and twenty. This varies a little, but is generally a pretty good approximation. With an unfavorable income-to-debt ratio or a lower credit score, you can expect to pay a higher rate of interest for your mortgage.
What’s the best kind of mortgage for you?
This is easily the most difficult, and the most important decision you will make. The type of mortgage you choose can have a dramatic impact on how much interest you will pay, and how much the loan will cost you over the long term. When you are talking in terms of a loan of several hundred thousand dollars over thirty to forty years, choosing the right type of loan is very important.
When you are a first-time buyer, it is often true that the simple loan is the best to choose. A conventional thirty-year mortgage, with a fixed interest rate, is the most traditional form of mortgage, and it is the one that is usually the easiest to cope with.
On the other hand, if your finances are a little tight, there can be a big advantage in choosing an adjustable rate mortgage. The initial interest rate on these is much lower, making this type of mortgage more affordable. It is particularly ideal for first-time buyers, as most will move to a new home within a few years. Therefore, you will likely be moving before the adjustable-rate period even kicks in.
It is best to avoid more complicated options, such as the interest-only mortgage. The ability to pay only interest on your mortgage repayments makes these mortgages very risky, as it is possible to end up owing more than the house is worth if the market experiences a downturn.
Buying points and locking in interest rates: Should you do it?
Most lenders offer points, and while buying points can be a great way of saving money in the long term, it is not a good option if you do not have much cash available. Points have to be paid in cash at closing, so it is not always a possibility. There are occasions where buying points will not save you enough money to make it worthwhile, so always check out how much the lender is charging per point to determine whether it is a good buy or not.
Should you lock in your interest rate? That is another difficult question, because locking it in at the right time can save you a pretty big chunk of change. The problem is, there can be a very small window of opportunity between timing it just right and missing out, and locking too late. If you lock in your rate at the wrong time it will end up costing you, so if you are hoping to ride the interest rate, it is very important to keep close tabs on the market.
Ryan Anderson is a freelance writer who writes about financial products and specific services available from mortgage lender.
