You're finally ready to make the leap and purchase your own home. Unless you have a stockpile of cash at the ready, you'll need to take out a mortgage to afford the home. Getting a mortgage is a little trickier than it might seem at first. The Federal Reserve recommends doing your homework and shopping around to get the best mortgage deal possible.
Down Payment Amount
Before the housing boom went bust, a lot of people got mortgages with a small or even no down payment. It's still possible to land a mortgage without a big down payment, but down payments that are less than 20 percent of the cost of the home usually mean you'll have to pay private mortgage insurance, according to the Federal Reserve Board. Mortgage insurance is an extra cushion for the lender in case you default. Making just a small down payment can also mean a higher interest rate, according to SmartMoney.
Interest Rates and Types
Know the interest rate and the type of interest on the mortgage. While you might see shockingly low rates advertised, your rate will be based on your credit score. You also want to know if the rate is fixed, meaning it will remain the same for the life of the mortgage; or adjustable, meaning it will go up or down every so often. The annual percentage rate is also an important number to know. It represents the interest rate plus any fees you'll need to pay.
Fees, Fees, Fees
No mortgage is complete without its share of fees. When you borrow money to buy a house, you pay not only the price you offer on the house but also account closing costs, underwriting fees and points. The Federal Reserve Board recommends asking for an estimate of those fees up front so that you have a general idea of what you'll be paying. You might be able to negotiate some fees. For example, the seller might agree to pay the closing costs.
If a mortgage offer seems to good to be true, it just might be, according to "US News and World Report." A bait-and -witch scam means you are offered a mortgage with a low interest rate or low fees at first. When it comes time to sign the papers, suddenly the interest rate has jumped or there are a number of additional fees involved. A number of scams target people who already have a mortgage but who are struggling to make payments, according to "US News."
- Stockbyte/Stockbyte/Getty Images
- What Are the Elements of Shopping for a Mortgage?
- Paying Down the Mortgage Debt Vs. Assuming a New Mortgage
- When to Put Money Down on Your Mortgage
- Does Refinancing a Mortgage Increase the Amount?
- Does It Ever Make Sense to Sell Your Home & Rent Instead?
- Advantages & Disadvantages to Paying Down a Point Mortgage Refinance