Sweet anticipation that gets more intense as each second goes by and first-time homeownership grows near is natural but must be mixed with healthy fear. Beside immense emotional rewards, most homes provide a buyer with the most valuable asset but also require biggest financial investment of an entire lifetime. Those very same reasons make it vital to gain full value from every home loan cent spent or lent.
Plan Smart for Head Start
Ready and willing don’t make homebuyers able because the last trait is cultivated by persistent effort to exhibit consistent financial responsibility. That means leaving below your means to save regularly and repay debts promptly. Aim for a 10-percent down payment and credit score of 650 or more to obtain best interest rate and terms.
Not All Home Loans are Alike
Multiple buyers may gain approval the same day by one lender of home loans but obtain identical sums on totally different terms. That’s true because no two applicant profiles are identical but comprised of each individual’s unique traits. Perceived risk holds most directly opposed sway on interest rate and loan cost, since higher risks dictate more per-loan profit to offset borrowers’ group default rate.
Common subprime loan offsets are higher interest, fees and down payments. Combined impacts can put buying on hold for an indefinite time, so know the ropes to avoid cold home loan TKO.
Home Loan Down Payment Lowdown
Logical deduction alone moots any discussion or rational doubt that down payment is single most vital point to note about home loans. Lack of liquid capital can’t seed new growth to feed a full harvest to reap. So, prep well in advance by going to an ideal growing field with greatest chance to gain full leverage for highest yield on limited planting stock. VA loans let a U.S. military vet or active-duty member get into a home for 0 down and typical FHA borrower puts just five percent of total sales price down at the closing table.
Uncle Sam runs these generous programs just to help folks like U.S. citizens who need a hand up from transient renters to happy land holders. If buyers default in either case, lenders face much less risk with loss protection guaranteed by the federal government. But conventional loans made on borrower strength alone require higher down payments up to 20 percent and private mortgage insurance premiums equal to some fractional percentage of monthly installments.
Some mortgage financiers are sticklers about down payment source that must come entirely or mostly from borrower funds. But many lenders care less and gladly accept gift letters from parents, friends or perfect strangers. Finally, be prepared for larger subprime loan down payment.
Fixed vs. Variable Interest Rate
As respective prefixes indicate, a fixed rate of interest remains the same from start to finish, while variable rates may fluctuate widely during full life of a loan. Variable-rate interest may be adjusted based on a verifiable index like T-Bill annual yield that varies by general economic and financial market conditions. But initial lower interest level can be a big tradeoff gained by unknown change in variable percentage rate. Most variable-rate mortgage contracts also stipulate a ‘ceiling’ figure to express the highest possible adjustment in the starting percentage level. Thus, all things considered, a variable rate is viable if you plan to move or refit two to three years after closing date. Be ready for higher interest of either kind for subprime loans.
Home Loan Payment Term Is Vital Concern
Lenders strongly prefer borrowers who defer repayment as long as possible because the longer payments extend, the more interest pours into bank coffers. Thus, very few offers appear for 20, 15 or 10-year home loans. Such omission has deliberate intention to exploit misguided fears that monthly payments increase in directly equal proportion to total length of fewer than 30 years.
Quite the direct correct contrary, 15-year mortgage payments are just 50 percent higher than otherwise identical 30-year loans that require twice as long to amortize. But credible reports say 30-year curses can be reversed even after the fact. You should make extra monthly payment per year directly to principal is a surefire way to a debt-free home.
Hence, numbers that never lie and always speak volumes tell yet another well-taken lesson by those who seek quick claim to free and clear homeownership. Gain vast headway before the shortest possible trip begins to build equity fast by much greater percentages of monthly payments going directly to principal vs. pure lender interest profit.
Shorter terms have two slight pros that might pose valid concerns for very few buyers. First is tougher approval criteria with higher income requirements to meet debt-ratio limits, as monthly payments would rise somewhat by briefer total repayment length. A viable solution may be accepting a longer term to meet initial approval criteria and making extra payments directly toward principal later on for the same practical gain.
A second possible issue is decreased mortgage interest tax deduction from a higher portion of each monthly payment going directly to principal when total loan term length is shorter that turn results in equally lower tax-deductible interest applicability.
While best advice is provided by qualified tax experts, this ‘problem’ appears nonexistent to every practical extent for at least two reasons. First, mortgage debtors with enough income to seek tax shelters are virtually guaranteed to either already have or easily find other safe harbors specially designed for that very use case scenario. Secondly, combined benefits far outweigh any detriments that are undoubtedly theoretical in the first place.
About the Author: Lizzie Weakley is a freelance writer from Columbus, Ohio. She went to college at The Ohio State University where she studied communications. In her free time, she enjoys the outdoors and long walks in the park with her 3-year-old husky Snowball. The information in this article is credited to Sente Mortgage, a lender that specializes in home loans in Austin, Texas.
Don't forget about the USDA rural housing mortgages which do not require a down payment. These mortgages offer 100% financing without requiring a mortgage insurance premium. Depending on the appraised value, closing costs can be financed in the loan and interested parties such as the seller can contribute up to 6% of the purchase price towards the closing costs and prepaids like homeowner's insurance. Rural and many suburban areas are eligible for USDA financing.