Whether you’re a first time home buyer or a repeat buyer, getting a mortgage can be complex and tricky. There’s a lot of factors that make a home loan, from mortgage insurance programs to closing cost factors.
Here are four common areas to know about when thinking about buying a new home:
1. Mortgage Insurance Programs
Buying a home is a big financial commitment--including saving up for a down payment. Common loan programs can require at least 20 percent down. But, if you can’t afford a down payment to meet lending requirements, don’t panic. You can still get a loan with mortgage insurance.
Mortgage insurance helps customers buy a home with a lower down payment -- sometimes only 3 to 5 percent. In this scenario, mortgage insurance may be necessary to help protect against the loan.
The cost of mortgage insurance depends on two factors:
- The type of mortgage applied for
- The amount of the down payment
The payment of mortgage insurance consists of two parts:
- Initial payment made at the time of closing
- Ongoing payment made each month with your principal and interest payment. Bear in mind, mortgage insurance payments may not be tax deductible.
2. Paying Points to Lower Rate
Want to save on long-term interest? You may want to pay points. Whether you're financing a new home purchase or refinancing an existing mortgage, a lender usually offers a range of interest rates at different amounts of “points”. A point equals one percent of the loan amount.
For example, 3 points on a $100,000 mortgage loan would add $3,000 to the costs of the loan.
$100,000 + (100,000 x 0.03) = $103,000
As a rule of thumb, each point lowers the interest rate a mortgage company is offering by a fraction of one percent. The lower the interest rate on the loan, the more points the lender has put into the loan
Analyzing various interest rates and associated points will save you money. If you plan to stay in your home for a long period of time, then it may be worthwhile to pay additional points to get a lower interest rate.
3. Down payment gifts
Potential home buyers may be able to afford a monthly payment but can't afford the cost of a down payment. A down payment gift (or grant) program may be a solution.
Home sellers can help buyers pay closing costs by giving a portion of their proceeds back to the buyer at closing. The amount of seller assistance that's allowed depends on the type of loan the buyer is getting. Because sellers are not allowed to give a home buyer any down payment funds, the gift assistance programs can play an important role in helping you purchase a home.
How it works:
- The seller enrolls their house in a suitable program and contributes an amount equal to the assistance their buyer will receive at closing, plus a fee.
- When the transaction closes, the down payment funds are wired from the gift assistance program to the closing agent. The seller plays no part in the transfer of funds.
4. Mortgage Closing Costs
Your mortgage closing costs can vary by which mortgage option you choose and the amount you want to finance. The closing costs on a 30-year fixed or a 15-year fixed may not be exactly the same as those associated with a 5-year ARM. Some loans, such as an FHA loan or a VAloan actually allow a seller to cover all or some of the closing costs.
The most common closing cost is the down payment. In addition to making your down payment, there are other costs and fees associated with your home purchase. A common misconception about mortgage closing costs is that they all go to the lender. In fact, many of the costs are related to services performed by others. Mortgage closing costs cover expenses associated with getting a home loan – from inspections and appraisals to title insurance, taxes and more.