Finding the Right Mortgage
After you have determined how much home you can afford, it is time to shop for the right mortgage. Since you are likely to be financing a loan for hundreds of thousands of dollars, it is crucial that you make a smart decision. A bad mortgage can significantly affect your finances over time.
The good news is that there is a type of mortgage available for almost every situation. The bad news is that choosing the wrong one can cost you tens of thousands of dollars in interest over the term of the loan. The most common loans come in two styles: fixed and adjustable interest rate loans.
A fixed interest loan will provide stability for you. The interest rate won’t change for the life of the loan, so your payments remain stable. One benefit with a fixed rate loan is that if interest rates go up, you continue to pay your same lower rate. On the other hand, if rates go down, you may be paying more than the current rate, although it may be possible to refinance for a lower rate.
With an adjustable rate loan, you sacrifice some of the stability in payments for the ability of the mortgage to adjust with prevailing interest rates. When interest rates are going down, this is can be to your benefit. But when rates are increasing, you can find yourself with a higher monthly payment.
The Down Payment
In addition to understanding what type of loan to look for, you should consider the down payment. In a traditional mortgage, you would provide a down payment of twenty percent or more of the price of the home. Twenty percent is the magic number because for most lenders, this is the amount of equity they require so that you can avoid paying PMI, or Private Mortgage Insurance.
When you are unable to put twenty percent down, the lender generally requires that you also pay the PMI premium, which can be anywhere from twenty dollars to a few hundred dollars each month. When shopping for a mortgage, take this into consideration and ask if there are alternatives to paying PMI if you will be unable to come up with the full down payment.