Homebuying is an arduous process because it involves more than finding the right property. Getting the best financing involves research, too. A diligent borrower asks prospective mortgage lenders pertinent questions before committing to a home loan. Questions of cost and affordability are the most important ones to ask. Considering the answers before you decide on a loan helps ensure you'll be able to meet the immediate and long-term expense of homeownership.
What's My Interest Rate?
Mortgage lenders can give you a good idea of what interest rate you qualify for based on your credit, your down payment and the loan type you want. Interest rates can vary daily and by lender, so the actual interest rate you end up getting may change, so it makes sense to lock in a rate if you like it. It is important to ask this question early in the loan process because you may decide it's best to hold off on getting a loan until you improve your credit or financial situation. The best interest rates go to borrowers with high credit scores, 740 and above, and large down payments of at least 20 percent.
How much the best loan terms cost up front is important because you want to ensure you have enough to cover them at closing. The lender requires a minimum down payment based on the loan type you want, which you must pay at closing. Not to be confused with a lender fee, the down payment amount allows you to get the loan and is used toward the home's total purchase price. The lender may charge you administrative fees, including origination, appraisal and processing fees. The fees vary by lender and are generally negotiable. "No closing cost" loans typically increase your interest rate in exchange for waiver of the fees, so you end up paying them over the life of your loan.
The type of loan you qualify for is important because you want to ensure it fits your needs. For example, first-time buyers and borrowers with moderate incomes may not qualify for conventional financing if they lack sufficient down payments. Ask the lender whether it offers low down payment or down payment assistance programs. A lender must be approved by the Department of Housing and Urban Development to offer you a Federal Housing Administration loan. FHA loans have government insurance, which protects the lender and enables it to make loans to riskier borrowers. FHA loans require only 3.5 percent down, as of 2012, and allow for the use of gift money to meet the down payment requirement.
It's important to know whether the loan you want has any features that increase its up-front and long-term cost. For example, a loan backed by the Department of Veterans Affairs requires you to pay a funding fee at closing to pay for the government guaranty. Low-down-payment loans typically require private or government mortgage insurance premiums, which you pay monthly until you repay a portion of the loan back. Such loans usually also require escrow impound accounts for the monthly collection of taxes and insurances. Adjustable-rate mortgages offer a lower initial monthly payment for a specific amount of time, typically three, five, seven or 10 years, according to Realtor.com. After the discount period ends, you could face a higher monthly payment.
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