By Betsy Fallwell
bFrom mastering all the financial and legal jargon to understanding how your debt and income impact how much you may qualify for, it’s vital that you learn about the application process before diving in head first.
Comparing Home Loans
Home loans come in all shapes and sizes. The most popular home loan in the United States is the 30-year fixed loan. Borrowers like this product because interest rates stay the same over a long term, meaning you’ll have low, stable monthly payments. You can find fixed rate loans with terms up to 40 years, or as short as five years; generally speaking, the shorter the term, the lower the accompanying interest rate.
But fixed rate loans aren’t your only option. If you’re looking for short term gains at the expense of taking on long term risk, an adjustable rate mortgage, or ARM, could be for you. With this type of home loan, you’ll get a low, fixed rate for an introductory period – usually between three and ten years – but after that, your interest rate will increase (usually annually) based on market conditions. This could cause your monthly payments to spike following the end of the introductory period. Interest-only loans also give you low monthly payments up front – you’ll only pay interest on your home loan during the introductory period – but later, you’ll be paying the interest and the principal, also giving you higher payments then you’d be looking at with a fixed rate loan.
If you think you’ll be in your home long term, a fixed rate loan will probably be the best option. But if you may move or refinance your mortgage after a few years, an ARM could save you money without the threat of increasing interest rates later on.
Understanding Your Borrowing Power
It’s perhaps the single most important concept you’ll have to understand to secure a home loan: your debt-to-income ratio. This ratio compares your debts with your income to quantify your borrowing power. The lower your debt-to-income ratio, or DTI, the more likely you are to qualify for the best loans with the lowest interest rates.
Your borrowing power also hinges on your credit score. FICO credit scores range from 300 to 850, but lenders want to see a score of 720 or higher to secure the best mortgage rates.
Help! I Need Somebody
If all this has you feeling overwhelmed, don’t panic. This is why mortgage brokers are there: to help you navigate the home loan minefield.
A mortgage broker can help you in a variety of ways. The biggest – and most important – way is by helping you secure a home loan that fits your lifestyle. Your mortgage broker will introduce you to a wide variety of mortgage products from a slew of lenders. But don’t worry about paying your broker – this is a free home loan service. Once you select a home loan, your mortgage broker will be paid a commission from the lender you choose.
A mortgage broker also helps you understand your rights as a buyer. Different states, and even different municipalities, have varying rules and regulations regarding the home buying process. Two key federal laws – the Fair Housing Act and the Equal Credit Opportunity Act – prohibit discrimination in real estate and credit transactions based on everything from race or religion to handicap or marital status. Many states have their own versions of these laws, which go beyond the federal laws.