American Eagle Realty's Blog
There are so many factors that go into finding and securing the financing to buy a home. While lenders require quite a bit of information for you to get a loan, you still need to be aware of your own financial picture. Even if you’re pre-approved for a certain amount of money to buy a home, you still need to dig into your finances a bit deeper than a lender would. The bottom line is that you can't rely solely on a lender to tell you how much you can afford for a monthly payment on a home. Even if you’re approved to borrow the maximum amount of money for your finances to buy a home, it doesn’t mean that you actually should use that amount. There are so many other real world things that you need to consider outside of the basic numbers that are plugged into a mortgage formula.
Run Your Own Numbers
It’s important to sit down and do your own budget when you’re getting ready to buy a home. You have plenty of monthly expenses including student loan debt, car payments, utility bills, and more. Don’t forget that you need to eat too! Think about what your lifestyle is like. How much do you spend on food? Do you go out to the movies often or spend a regular amount of cash on clothing? Even if you plan to make adjustments to these habits when buying a home, you’ll want to think honestly about all of your needs and spending habits before signing on to buy a home.
Now, you’ll know what your true monthly costs are. Be sure to include things like home insurance, property taxes, monthly utilities, and any other personal monthly expenses in this budget. If you plan to put down a lower amount on the home, you’ll also need to include additional insurance costs like private mortgage insurance (PMI).
The magic number that you should remember when it comes to housing costs is 30%. This is the percentage of your monthly income that you should plan to spend on housing. Realistically, this could make your budget tight so this is often thought of as a maximum percentage. By law, a lender can’t approve a mortgage that would take up more than 35% of your monthly income. Some lenders have even stricter requirements such as not allowing a borrower to have a mortgage that would be more than 28% of monthly income. This is where the debt-to-income ratio comes into play.
As you can see, it’s important to take an earnest look at your finances to avoid larger money issues when you buy a home.
Adjustable rate mortgages are also known as “ARM” loans. These are home loans with monthly payments that move up and down along with interest rates and the market. There’s different periods that occur throughout the time of the adjustable loan including an initial period where the rate is fixed for a certain amount of time. The rates will change along with preset intervals of change.
Rates Start Lower Than Fixed Rate Mortgages
Interest rates during the fixed rate period of an adjustable mortgage are usually lower than that of fixed-rate mortgages. The most common type of adjustable rate mortgage is called the 5/1 ARM. This means that the rate is locked for a total of 5 years before it becomes truly adjustable. After the 5 years the rate will change every year. Other forms of ARM loans are the 3/1, the 7/1, and the 10/1.
Rate Indexes And Margins
Following the fixed-rate period, the interest rate adjusts with what’s titled the index interest rate. This rate is set by the market and is released periodically by an independent party. Since there are a variety of indexes, your loan will state which index your adjustable rate mortgage will follow. To set your exact rate, your lender will look at the index and then add a number of percentage points that has already been set in place. This is called the margin. For example, an index rate of 2.5 percent and a margin of 2 will equal an interest rate of 4.5 percent. As the index changes, this number will go up and down.
Adjustable Rate Mortgages Come With Caps
If you do decide to go with an adjustable rate mortgage, you should know that you’re protected from extreme rate increases. These loans come with caps that limit the amount that both rates and payments can change by. There are several different kinds of caps including:
Periodic Rate Cap
This limits the amount that an interest rate can change from one year to the next.
Lifetime Rate Cap
This type of cap limits how much the interest rate can change overall throughout the life of the loan.
Payment Rate Cap
This limits how much the monthly payments can rise over the life of the loan in a dollar amount. This is different than other caps, since it denotes dollars instead of percentage points.
Is This Type Of Loan For You?
Adjustable rate mortgages can be good, depending on the state of the economy and your own financial situation. Stay educated and shop around in order to get the best rates available for you.
Mortgage lenders are busy people. Despite the fact that they sit with you and go over your mortgage, they may not cover finite loan details, the types of details that could cause your mortgage payments to spike seemingly out of nowhere. These are the very details that could push your monthly mortgage payments out of your reach.
Avoid sneaky mortgage fees and penalties
To protect yourself from signing a mortgage with hidden financial dangers like unnecessary fees and penalties, ask questions. Also, meet with your realtor and ask him to tell you what to expect during the loan signing process. This will help to familiarize you with the different stages of the house price negotiation and final closing process.
Questions to ask your realtor should focus on details like closing costs, mortgage application fees, mortgage insurance and title fees. Another item that you want to get clarity on is the exact dollar amount or percentage of your home's value that you have to pay in property taxes. Find out about fines and penalties that are associated with late property tax payments in the jurisdiction that you buy a house in.
Answers that your realtor gives you during one-on-one meetings will help you to budget your way through the entire house buying process. Don't be intimidated by your realtor's breadth of real estate knowledge. Ask as many questions as you need.It's better to ask questions before you meet with a lender and sign a mortgage than after you've bought a house and start struggling to keep up with your mortgage payments.
More questions for realtors and lenders
In addition to meeting with your realtor to discuss common mortgage fees, ask the lender who you work with about lesser known fees and penalties associated with your particular loan. Find out the percentage of penalties for:
- Submitting payments late (Also, find out if you have to pay higher late penalties if you are more than 10 days late paying your mortgage. Another thing that you want to get information on is how late penalties are calculated. For example, will you have to pay a straight $15 if you're late with your mortgage or will you have to pay 2% of the total cost of your monthly mortgage?)
- Paying extra on your principal (There shouldn't be penalties for paying more on your principal, but it doesn't hurt to ask.)
- Refinancing your mortgage (in the event that an unexpected event puts you in the position of needing to refinance your mortgage)
- Drive by inspections (These inspections occur when a lender sends an inspector by to evaluate a house after you have purchased the house. Make sure that you don't get stuck with these additional inspection fees.)
A mortgage may get scary if you don't know what you're stepping into. Regardless of the lender you finance your house through, you'll likely have to pay for more than the price of the house. Make sure that the total amount of your mortgage doesn't find you paying more for a loan than the house is worth. You can do this by asking smart questions throughout the entire house shopping, loan negotiation and mortgage closing process.