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So, you’ve saved enough money for a down payment on a house or an apartment? Congrats! Who cares that you haven’t ordered takeout, been to a restaurant or on vacation in years? You’re about to be a home owner, and that’s better than mediocre pizza any day.
Of course, getting from cash saved to keys in hand isn’t exactly a quick and easy process. There’s the whole finding a place you actually like and can afford. Then, both the bank and the sellers have to give you the green light. Sure, buying a home can feel stressful and overwhelming at times, but stick with it and you’re sure to be glad you did it in the end.
Now unless you’re truly rolling in the dough and can afford to buy your new place outright, you’ll need to get a mortgage. A mortgage is basically a special type of loan that’s used to purchase property, like a house or apartment. Online lenders like those found on Bankrate are your best bet when looking for the cash you’ll need to complete your purchase.
Chances are, if you already have a big chunk of cash saved, you’ve done your fair share of research on mortgages. But believe it or not, there are still some things first-time buyers learn in the middle of the process. To help you feel even just a little bit more prepared for the big step ahead of you, read on for four surprising mortgage facts from a home-buying expert.
What to Know About Mortgages
1. Pre-Approval Is More Important Than You Think
Getting pre-approved for a mortgage by a bank or online lender is an absolute must-do when buying a home. Not only is this a good indicator of if you can get a loan at all, but it also gives you the most accurate sense of how much you can realistically spend on a place. Sure, you may like loft-style apartments and want three bedrooms, but there’s a chance you’ll only be pre-approved to spend what will get you a pre-war studio. It’s better to face reality before you start looking at real estate to buy, so you don’t get your hopes set on something you ultimately can’t afford.
Another reason pre-approval is so important? “Sellers have many bids to choose from, and they won’t take your offer seriously unless a lender has run your credit, checked your pay stubs, vetted your tax returns and declared you ready to borrow,” explains Jeff Ostrowski, senior mortgage writer at Bankrate.com. This is especially true in today’s market. You’ve probably read how houses are selling at record rates these days. Some places receive multiple above-asking offers within hours of being listed. Given the competitive home-buying landscape, it really is imperative that your pre-approval is all squared away at the start of your search so you can act as quickly as possible when you find something you love.
2. Yes, Your Credit Score (Still) Matters
Some buyers think that if they put more than 20% down or if they have a really high annual salary that an average or low credit score won’t really matter. Reality check: that’s just not true.
“As a first-time buyer, you should know that your credit score is the most important factor in your mortgage rate — so you should work on boosting that number as much as possible before you apply for a mortgage,” Ostrowski says.
If you’re not sure how to do that, start with the basics. Always pay at least your monthly minimum payments on time; if you can afford to pay a little more, that’s even better. You should also keep a close eye on your credit score on a monthly basis to be on the lookout for errors or fraudulent activity on your credit accounts.
If you have a lot of debt, think about a debt consolidation loan which could help make monthly payments a bit more manageable.
3. Seriously Consider the Different Mortgage Options
Given that interest rates are so low right now, the choice between a fixed-rate mortgage and an adjustable-rate mortgage is currently a no-brainer. To be clear, a fixed-rate mortgage means your interest rate stays the same for the duration of your loan. An adjustable-rate mortgage, on the other hand, typically has an interest that fluctuates (both down and up) over time. “At the moment, a fixed-rate mortgage is almost definitely the right call. Fixed rates are near record lows, and they’re more likely to rise than fall in the coming months,” Ostrowski says.
The choice between a 15- or 30-year loan, however? That decision isn’t as straightforward. Ostrowski explains that a longer loan term will mean lower monthly payments, which is ideal for those who may be struggling with recurring expenses. Some people are willing to pay more each month if it means they’re able to pay back the loan faster. For those folks, a shorter loan term may be the better option.
“The choice between a 15- and a 30-year loan is a personal one,” Ostrowski explains. “With affordability a challenge for many buyers, a 30-year loan just is more affordable. However, if it’s important for you to pay off your debt quickly, a 15-year loan might make sense. For instance, if you’re nearing retirement and you want to retire debt-free, a 15-year term will help you achieve that goal.”
4. It’s Never Too Early to Think About Refinancing
Yes, it may seem strange to be thinking about refinancing before you even have a home or a mortgage, but home ownership is a long-term commitment. That means it’s important to be aware that what’s best for you right now might not necessarily be best for you in five or 10 years. That’s where an awareness of refinancing options comes in handy.
Understanding how refinancing your mortgage works is also critically important if you’re a first-time buyer using an FHA loan. Because these loans require less money upfront in the form of a down payment, the monthly fees associated with paying for your home tend to be higher. “The FHA loan gets first-time buyers into homeownership, but once you’ve got 20% equity in the home, it might make sense to refinance into a conventional loan,” explains Ostrowski. “That’s because you won’t have to pay mortgage insurance, a monthly expense that benefits the lender and not you.”
He goes on to add that home owners should always take interest rates into consideration before deciding to refinance. Interest rates right now are very low, but no one really knows how long that will last. “If [future] rates are significantly higher than they are now, refinancing might not be a good deal,” Ostrowski says.