Financing Your New Home
One of the biggest decisions you will be faced with when buying a new home is determining which loan is right for you, assuming you are taking out a loan and not paying for the house in full with cash. The three factors to consider are the term, rate, and type of the loan. As a homebuyer it is important to fully understand what your options are and how they can affect the monthly payment amount and your financial situation over time.
First, the term of the loan needs to be considered. There are a number of options, but two popular ones would either be a 15 or 30 year loan. One of the benefits of a shorter term such as a 15 year loan is a significantly lower interest rate. Another perk is that you are paying more money each month towards your principal balance (amount you owe), thus enabling payoff in half the time. Of course, because more must be paid each month towards principal, your monthly payment will be higher. Consider this scenario: you want to purchase a home that costs $625,000 and are putting 20% down, so you take out a loan for the balance of $500,000 for 30 years at 4% interest. In that scenario your monthly principal and interest payment is $2,387 and you will pay just under $360,000 in interest (in addition to the principal amount of $500,000) over the 30 year life of the loan. Compare that to the same amount borrowed at 3.5% for 15 years. Now your monthly principal and interest payment would be $3,574 ($1,187 more per month) but you would pay just under $143,400 in interest over the 15 year loan period. Though you would have a larger monthly obligation, your home would be paid off in half the time saving you over $216,000 in interest. If you have enough saved for a 20% down payment and have good credit, either of these options would work well for you. This option utilizes a conventional loan. Most borrowers go this route because it typically costs them less (aside from the hefty down payment).
For those who don’t qualify for a conventional loan, there are other options. Among these are FHA, VA, USDA, and other special loans offered throughout various communities. FHA loans give buyers the opportunity to purchase a home with as little as 3.5% down. Because the borrower carries a higher loan to value ratio, mortgage insurance will need to be paid in order to insure the lender in the event of a default on the loan. Mortgage insurance must be paid until the borrower owes less than 80% of the home’s value. Veterans are afforded the option of a VA loan which does not require mortgage insurance but does cost the borrower a funding fee. The USDA has a similar program for those in rural areas. With a USDA loan, the borrower may qualify for a zero down payment but will pay an upfront fee as well as mortgage insurance. In addition to these options, many local governments offer loan programs for low to moderate income families looking to buy their first home.
Another factor to consider in choosing a loan is the type of rate that you are committing to. Your mortgage rate can be fixed or variable. Fixed rates are more popular because the borrower is guaranteed a rate for the life of the loan. Variable rates entice some because of their lower initial rate which is only guaranteed for the fixed period. Once that is over, the rate can change each adjustable period, which in most cases is annually. Adjustable Rate Mortgages, or ARMs, are named by the duration of their fixed period followed by their adjustable period. For example, a 5/1 ARM has a fixed period of 5 years but then the rate can change each year for the life of the loan. It is important to understand this before choosing an ARM since after 5 years, you could pay a substantially higher amount than you would have had you opted for a fixed rate.
If you are not in the market for a new home but have an existing loan that you would like to restructure, we may be able to help you out too. Depending on your situation, refinancing might be something to consider. Rates are still low, historically speaking, and refinancing could save you some money every month or over the life of your loan. Something else to think about would be using some of the equity in your home, by utilizing a cash-out refinance. If you are paying the minimum monthly payment on your credit card bills each month, you are paying off a loan that is amortized over a time period similar to that of a home loan. The only difference, of course, is that the rate on a home loan is far lower than that of your credit cards.
No matter your personal and financial situation, Magnolia Estates Realty can help you brainstorm the best options for either the new purchase or refinance loan that is right for you. Our team is happy to help you formulate the best next steps for today and for years to come.