Buying a home involves serious financial considerations. Most young couples think in terms of mortgage loans, but there are hundreds of types of loan products and a traditional mortgage might not be the best option for your financial situation. Talking with a professional financial planner or mortgage broker, one offering a variety of finance options for your new purchase, can help you find the best solution. Understand the basic options before that discussion so you have a foundation to make an informed decision for your new home purchase.
Cash talks loudest in bargaining for a new home. If you have the cash to pay for a home, however, analyze this option carefully before deciding. Federal tax and some state laws allow you to deduct mortgage interest payments from your income and you'll miss out on these deductions by paying cash. The tax write-offs, combined with your cash in an interest-bearing bank account or a good investment, might mean paying cash for a home is not your best financial option. On the other hand, you may benefit from lower closing costs, a better bargaining position and a faster escrow period.
Commercial and private lenders offer mortgage options with varying terms and conditions for homebuyers -- all requiring fees and interest payments. The most common loan types are the adjustable, fixed and combination interest rates. Adjustable rates change over time, typically every year, while fixed rates stick with the interest rate listed on the mortgage when you sign the home loan. The most common fixed-rate loans are 15- or 30-year agreements. Combination interest rate loans sometimes start with adjustable rates and then switch to a fixed rate for the last years of the loan period. Combo loans can also start at an extremely low fixed interest rate to qualify you for the loan -- typically for a couple of years -- and then switch to a higher adjustable interest rate for the rest of the loan.
Lease- or Rent-to-Own
Lease- or rent-to-own loans allow you to buy the home by paying lease or rental payments to the owner. Some agreements require you to also put down some cash, while some agree to the rent-to-own contract on the house without any down payment. A portion of your monthly payment applies to the home purchase. The sales contracts in these options clearly state the home price, monthly payment amount, down payment and the number of years required before the buyer must obtain a new mortgage loan on the house. Like all important financial contracts, consult an attorney with experience with this type of home sale to help ensure the contract includes legal protections for you as the buyer.
Land contracts, also called installment sales, are popular in some states and rarely used in others. In this buying option, the homeowner typically doesn't owe anything on the home -- no mortgages or loans. You make payments directly to the homeowner each month, and after a set number of years, you own the home. The seller then turns over the property deed to you. This buying option requires working with an legal professional with experience in land contracts to protect your interest in the property.
Look into available government programs to see if you qualify for special loans with low down payments or reduced interest or closing costs. For example, if you or your spouse served in the military, you may qualify for a VA loan. Special programs are sometimes available for first-time homebuyers, people seeking to purchase and renovate a rundown property, or those buying a home in a rural area. The offers may be limited to certain areas of the country or to a specific time period.
- Forbes.com: Creative New Ways to Buy a Home
- Federal Housing Finance Agency: Home
- GovLoans.gov: Loan Terms
- Housing and Urban Development: Looking for the Best Mortgage -- Shop, Compare, Negotiate
- Forbes: The Benefits of Buying a Home With Cash
- Realtor.com: Should You Pay Cash If You Can?
- Realtor.com: Lease to Own a Home
- CNN Money: Rent-to-own Your Home -- Pro and Con
- NASDAQ: Land Contract
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