The process of buying a home is usually filled with a lot of questions…how can you find the right agent? Which home is the right one for you and your family? When it comes time to choose a home loan, things can get even more confusing.
Let’s look at five of the most common mortgage questions home buyers ask, so we can help eliminate some of the confusion.
1. Are Mortgage Interest Rates Negotiable?
Definitely. You should always compare rates from different lenders. And don’t be afraid to ask one lender to match another bank’s lower rate. To secure the best interest rate, it’s a good idea to clean up your finances before you even apply for a mortgage.
For conventional loans, a FICO score of 760 or higher will usually help you get satisfactory rates. Don’t worry if your score isn’t that high, though. There are several ways you can improve your credit score, but they may take some time. If your credit card debt is bringing down your score, one solution is to transfer your balance to a card with a 0% interest period of up to 18 months. You’ll be able to improve your credit score by paying off the transferred balance more quickly.
2. What’s the Difference Between Adjustable Rate and Fixed Rate?
With an adjustable-rate mortgage (ARM), the interest rate varies for the life of the loan. You usually pay a lower rate for several years. After that, the rate can go up or down every year depending on changes in mortgage rates. Is an adjustable rate mortgage right for you? If you’re more concerned about initial payments than payments several years down the road, this could be a good option for you. Also, if you plan to sell the house in a few years, an ARM could save you some big money since you would avoid the possible increase in monthly payments when the rates adjust.
The most popular choice for home loans is a fixed-rate mortgage since it has the same interest rate for the entire term of the loan. To make homes more affordable, the Federal Housing Administration (FHA) established fixed-rate mortgages. Your monthly payments won’t increase during the life of the loan since the rate is fixed. The combination of a low rate and the stability of a fixed rate is appealing to most borrowers today.
Both rates are offered by lenders on 15- or 30-year terms. You’ll have higher monthly payments with a 15-year loan, but you’ll pay a lot less in interest than with a 30-year mortgage.
3. Do I Need Private Mortgage Insurance?
You’ll need to pay private mortgage insurance (PMI) in addition to your monthly payments if your down payment is less than 20%. Once you have at least 20% equity in your home, you can ask to cancel PMI. If you’re ever unable to pay your mortgage, PMI will step in. Another option is to ask your lender to cover the mortgage insurance. The interest will be higher, but it may be cheaper than paying PMI.
4. What’s the Difference Between Pre-qualification and Pre-approval?
The first step is pre-qualification. This is not a promise to loan you money, but it gives you an idea about how much of a loan you might qualify for.
The second step is pre-approval. This is a statement from a lender that you qualify for specific amount after your financial and credit history have been reviewed. A pre-approval letter lets sellers know you’re ready to buy, and you have the money to back up an offer.
5. How Much Home Can I Afford?
Most potential homeowners can afford to finance a home that costs between two and two and a half times their gross income. For example, someone who earns $100,000 a year can afford a $200,000 to $250,000 mortgage. However, this is just a general guideline. Your actual cash flow isn’t considered in this calculation, but it should be. Just because you qualify for a loan big enough to buy the home of your dreams doesn’t mean you can really afford it. You certainly don’t want to harm your financial future or cause your home to be foreclosed.
These are just a few of the question’s homebuyers ask. Knowledge is power, so whether you’re buying or selling a home, it’s important to know as much as you can before you begin the process. At 1st Alliance Mortgage, we’re here to answers all your questions and guide you through the mortgage process. Contact us today…we’d love to help you get into the house of your dreams!