Buying Your First Home? Don’t Miss These Vital Keys to Your First Mortgage!

One of the most important parts of manifest destiny and the American dream is home ownership. Owning your own home can be a very smart investment decision since prices tend to increase faster than the inflation rate, and now, with the recession dropping home prices and interest rates to their lowest in the last decade, there isn’t a better time to buy! Because of the current market timing and the fact that it’s a widely known as a smart investment, now is the time to start considering the idea. Before you rush out, call a realtor and start looking for a house, you should start by seeking out the perfect mortgage for your budget.

To begin your home mortgage search, talk to credit unions, banks, and brokers in your area. You’re looking for someone to hold your hand through the process, but you also want a decent rate with low fees, so make sure to shop around.

When you’re looking at rates, you will be shown two different types - variable/adjustable rate (ARM) and fixed rate. The ARM rate is usually shown as a promotion at a cheap rate, sometimes called a “teaser.” After the fixed period of the ARM is up, you can expect rates to rise significantly if you get into one of these adjustable rate mortgages.

ARMs have two specific things you look for to use in your analysis - when the rate adjusts (anywhere between one month to 10 years) and what the cap on the interest rate is. Usually, the rate will adjust to whatever the prime rate (the federal government chooses this number) is at the time of the adjustment, plus a certain percentage of ‘mark-up’ that pays the bank. When you discover the rate cap, use a mortgage payment calculator to find out how much your maximum monthly payment is, worst case. That’s not to say your mortgage will actually adjust to that rate, but it’s a prudent idea to plan for different scenarios - including worst case.

In the current economic environment, we have extremely low interest rates. By signing on an ARM right now, you would more than likely end up with higher payments later, as the economy rebounds and the rates increase again. However, if you plan to move into a new home before your interest rate is set to adjust, it isn’t a bad idea to capitalize on the low rate. If you feel that rates will continue to drop in the future, an ARM can put you in a great position to take advantage of that.

Fixed rate mortgages are less complicated than ARMs because you know exactly what your payment is for the life of the mortgage. The fixed rate, as it implies, locks in your interest rate for the entire duration of the loan, which is great for current economic times with low interest. This type of mortgage protects you if interest rates go up, and if interest rates fall, you’ll have the option to refinance at the lower rate.

The length of the term on your mortgage can greatly affect the total amount that you pay over the course of the loan term. A shorter, 15-year mortgage has much less compound interest tacked on, so the payments won’t actually double that of a 30-year mortgage. 15-year mortgages can be surprisingly affordable, but if your income can vary from month to month, and it might be a stretch, go for the longer term. With the 30-year mortgage, you can always make additional principal payments during good months to help pay off the loan quicker - effectively racking up less in interest.

Becoming a home owner is an important step in everyone’s life, and with the right home mortgage loan, it can be just as affordable as your rent payment. Start building equity and investing in you home today - you’ll look back on this moment and be glad you did.