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You've been thinking about buying your own home for quite a long
time, and now you're ready to take the plunge. You've been saving
money for a down payment, and you know the next step is preparing
to apply for a mortgage.
But where do you start?
Here are the top 5 things you need to know before approaching a
mortgage lender.
1. Understand Your Options
All mortgages are not created equal. There are several different
types, which vary based on interest rates and payment terms.
For example:
- With a fixed-rate mortgage, your monthly payments remain the
same during the entire length of the mortgage. There will be
no variations in monthly payments, regardless of changes in
interest rates and inflation.
- With an adjustable-rate mortgage, you will often receive a
lower initial interest rate, but your monthly payment amount
can rise and fall as interest rates fluctuate (within certain
caps or limits).
- With a balloon or reset mortgage, you once again may be offered
a low interest rate, but it will hold for a limited time. After
that, the balance of the mortgage will be due, or you will need
to refinance.
2. Become a Rate Watcher
The state of the economy influences interest rates, which ebb
and flow on a regular basis.
Your daily newspaper tracks these rates, so stay current by
watching whether rates are rising, falling or remaining stable.
It behooves you to become as educated as possible about how
these rates will affect your mortgage and to see if you want to
postpone applying for one until rates drop.
3. Get Pre-Approved
Consider getting pre-approved for a mortgage, says Frank Nothaft,
PhD, vice president and chief economist for Freddie Mac, the
stockholder-owned corporation established by the United States
Congress in 1970 to create a continuous flow of funds to mortgage
lenders in support of homeownership and rental housing.
"A benefit of being pre-approved for a mortgage loan is that it
gives the prospective homebuyer additional bargaining leverage
when competing with other prospective buyers for a home," he
says. "A home seller may be more likely to accept an offer from a
pre-approved borrower because the seller knows the buyer can get
a loan than from another bidder, who may be exactly the same in
financial qualifications and offer, except that he lacks the
pre-approval."
4. Consider Making a Higher Down Payment
Making a higher down payment on a home will reduce your mortgage,
but there are definite pros and cons, according to Dr. Nothaft.
"The pro of putting down more money is that you can often obtain
lower-cost financing," he says. "High down-payment loans that is,
low loan-to-value ratio represent less default risk to a lender,
and are safer. That may translate into a lower interest rate or
obviate the need for mortgage loan insurance.
"The con," he continues, "is that it may result in the borrower
having to delay a home purchase, because the borrower does not
have enough liquid assets to make a larger down payment. Low
down-payment loans are especially important for first-time home
buyers, who typically do not have the financial wherewithal to
make a large down payment."
5. Select Your Lender Carefully
As in any industry, there are "bad apples" who ruin the
reputations of respectable professionals. In the mortgage
business, these folks are known as "predatory
lenders" individuals who take advantage of vulnerable consumers.
Those most prone to becoming victims include the ill-informed,
the elderly, women, minorities, low-income buyers and consumers
with bad credit.
To avoid becoming "prey," select a lender with solid credentials.
You can secure a referral from your bank or credit union, real
estate agent, government housing agency, or friends and relatives
who have successfully purchased homes.
Never trust a mortgage offer that arrives via email, as it likely
originated from a spammer.
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