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Did you know that price may not be the most important number to consider when you’re shopping for a home?
A home with a lower price could end up costing more each month!
If the lower-priced home has higher taxes or associated costs (like homeowners association or condo/co-op fees), you could end up with a higher monthly payment than you expected.
Here’s a quick Mortgage Calculator to use while you’re shopping. It will help you estimate a monthly payment for the homes you like. You can see which are truly the most affordable for your budget.
What makes up your mortgage payment?
Let’s break down what items make up a mortgage payment. A mortgage payment consists of principal and interest. Principal refers to the actual amount of money you borrowed. As with most loans, mortgages come with interest. The interest is a percentage of the principal that you pay the lender.
On top of Principal & Interest, you can expect to add on your homeowner’s insurance (this varies by state) and property taxes. The average property tax nationwide is around $2,500 according to most recent Census data.
If you are choosing to go with an FHA loan or a conventional loan with less than a 20% down payment you will most likely also acquire PMI which is Private Mortgage Insurance.
On top of principal and interest, you will need to consider monthly fees such as an HOA, Co-Op fees, or any other additional fees that you may owe on a monthly basis.
The interest rate on the loan depends on several factors, including but not limited to loan term, type of loan, credit score, location of the home, amount of downpayment, loan amount, etc.
What costs should you expect before buying a home?
There are a few costs associated with the home buying process, and we will break them down below.
The most common fee associated with purchasing a home is appraisal and inspection fees.
In order to determine the value of a home, a third-party appraisal is almost always required. This fee can range in price anywhere from $300-$1000 dollars.
A home inspection is usually required to determine the livability of the home. Home inspectors look to make sure the home is structurally sound. An FHA Home inspection is typically more strict than other loan types.
A credit report is required to move forward with the loan process, and the process of pulling credit usually results in a fee. This fee is typically less expensive ranging from $50-$100.
Lending origination fees. Lending origination fees are typically a flat fee paid to the lender composing your loan.
Title Fees are required fees that are paid to the title company, such as the title search fee and the cost of title insurance usually required by the lender.
HOA fees may be required if the home you are purchasing has a Home Owner’s Association. Some HOA’s require you to “join” which usually comes with a fee that needs to be paid upfront.
Other fees may come up during the loan process, each fee will be outlined on your Loan Estimate form. It’s important to consult your licensed loan professional if you have any questions on any of these items.
What types of loan terms are available?
There is a variety of loan terms available when obtaining a mortgage. The most popular is a 30-year mortgage. Another option is a 15-year mortgage. The difference between the two is the length of the loan. A 15 year will be paid off in 15 years, typically these come with a lower interest rate, due to the length the borrower often pays significantly less in interest over time. A 15-year mortgage however will come with a higher payment than a 30-year loan.
Other loan terms include ARMS or adjustable-rate mortgages. These loans have an adjustable rate. Typically the rate is locked in for a set amount of time, ex: 5 years, and then the interest rate on the loan will adapt to current market conditions. With an adjustable-rate mortgage, the initial mortgage payment may be lower than a fixed mortgage and also have a lower rate, but this can change. Adjustable-rate mortgages may be a good option for someone who is not planning to stay in the house for long or is anticipating major life changes that would require them to depart that home within the first few years. To learn more about the difference between fixed and adjustable-rate mortgages click here.
What types of loans are available?
There are a plethora of loan options depending on your unique scenario and mortgage needs. Most commonly used loans will fall under the following categories:
An FHA loan is a loan that typically requires a lower down payment (as low as 3.5%) and has less strict qualifying guidelines, which is usually beneficial to first-time home buyers, to read more about FHA Loans here.
Conventional loans offer several different down payment options (as low as 3%) and do not require mortgage insurance. Read more about conventional loans here.
If you are a veteran, utilizing your benefits to obtain a VA Loan can be a great way to get a home loan with limited closing costs. Read more about VA Loans HERE.
A DPA Loan is designed for those who need assistance with the down payment costs. Often times a borrower will qualify in all other aspects of a loan but will not have enough cash on hand for a down payment. Down payment assistance (DPA) helps homebuyers with grants or low-interest loans that reduce the amount they need to save for a down payment.
What will my interest rate look like?
As stated above, the interest rate is dependant upon a variety of factors included but not limited to loan term, type of loan, credit score, location of the home, amount of downpayment, loan amount, etc.
Mortgage interest rates are still at historic lows, with the national average for a 30-year loan sitting just above 3%. Purchasing a home is still afforadble.
What will your down payment look like?
The answer varies by loan program and homebuyer financial situation. Misconceptions on this topic are high. As of recent studies, the majority of Americans still believe a 20% down payment is required to buy a home. The truth is that home loan programs range from 3% to 20% down payment on average.
Conventional loans can go as low as 3% but carry more stringent qualifying factors. FHA loans offer a 3.5% down payment option with more relaxed qualifying factors but also carry heavier appraisal requirements and may involve a Mortgage Insurance (MI) factor. Some government programs like VA and USDA will carry 100% financing for eligible homebuyers and/or properties. 100% financing does not mean zero dollars is required for the whole process. There will be processing and underwriting fees as well as closing costs from title and escrow. Borrowers should know that going into a 100% financing loan.
Other home loans will require a higher down payment. Jumbo Loans tend to carry a 10%-20% down payment requirement on average and higher-risk borrowers may be required to put down more in order to qualify.
State and Federal Grants are also available for Down Payment Assistance. These programs help cover the costs of the down payment and transaction for those who are creditworthy and earn enough monthly to cover a monthly house payment but do not have a large chunk to put down. These programs typically require a minimum credit score as well as mandatory Mortgage Insurance and homebuyer classes.
By using our interactive mortgage calculator above you can play around with different down payment scenarios.
For those of you that are currently renting, you can determine how much home you can afford using our rent to own mortgage calculator:
What documents will I need for a home loan?
Documentation may vary per individual but you can anticipate a certain set of documentation to be required for almost any loan. Usually, you will need to provide:
Items to be gathering for the Loan are:
- Last 30 days of Pay Stubs.
- Last 2 years of Federal Tax Returns with Schedules or Business Expenses if filed with the returns for 2018 & 2019.
- Last 2 years of W-2’s or 1099’s
- Clear Photo Image of your Driver’s License.
- 60 Days of Bank Statements, All Pages even if the last page states intentionally left blank.
- Last Statement from any 401k, Investment or Retirement Accounts, All pages.
What is the process for starting a mortgage application?
We recommend having a conversation with a licensed loan officer before beginning the home buying process. This is a good time to communicate your goals and desires as you navigate through finding a home and a loan that works for you. A Loan officer can then pre-qualify you to start your search for a home, this equips you with the knowledge of just how much home you can afford. A mortgage calculator can help you get a rough idea of what type of payment you are looking for, however to see exactly what works best for you, consult your loan officer.
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