You have saved and saved and saved to buy your first home. Maybe you moved back in with your parents to save for a down payment. Maybe you are living in a rental that takes a huge chunk of your paycheck. Maybe you’ve decided it’s time to pay your mortgage v. your landlord’s mortgage.
Taking out a mortgage to buy a home is more than likely the largest debt you will ever take on in your life. Buying a home is a huge investment and it means you’re starting to build up equity while providing you with a piece of the American dream, not to mention the tax deductions.
If you are entering the real estate market for the first time here are some explanations on how and why a mortgage works.
What Is a Mortgage?
In the simplest of terms, a mortgage is a loan used to buy a home where the home itself serves as collateral. Most, if not all of people looking to get a mortgage have at one time opened a credit card (if you don’t have a credit card, you might want to get one as you will need to establish a credit history. Your mortgage agent will advise you on this.). While the credit card application process was very easy, that is not so with a mortgage approval process. It is long and thorough. I tell all my buyers entering the mortgage application process that they will need pay stubs, documentation of all your debts, month’s worth of bank account statements and really just about anything else financial in your life. Going into this process you should know that you may be asked multiple times for the same items. Have patience. It helps to be prepared by gathering all your financials ahead of time.
When you decide you want to buy, and need a mortgage, you should get the help of a mortgage agent to get pre approved. You will be asked questions, and if the answers are satisfactory will be given a pre approval. Hopefully you have been paying your student loans on time as that will give your credit a boost. Generally the better your credit score, the lower your interest rates will be. A preapproval will show you exactly how much of a loan you can obtain and will also allow you to make an offer on a property you like.
One of the biggest reasons many are reluctant or feel they are unable to get a mortgage is the down payment. If you can put 20% of the purchase price down at closing you may not be able to avoid “PMI” or Private Mortgage Insurance. This is a payment outside of your mortgage to protect the bank in case you default. This payment doesn’t deduct from your principal and should be avoided if at all possible. However, you can buy a home with no money down if you are a veteran through a VA program and there are other mortgage programs that allow you buy for less than 20% down. The Federal Housing Administration (FHA) offers loans that require small down payments. There are other creative programs such as Mass Housing that reduce or stop PMI altogether at less than 20% down. Speak with an experienced mortgage agent to review your best option. If you don’t know one just ask me, would be happy to refer you to one.
What Kind of Mortgage?
- A fixed-rate mortgage is one in which the interest rate of the mortgage stays the same for the life of the loan. Current loan rates on 30 year mortgages are under 3%.
- An adjustable-rate mortgage (ARM) is one where the interest rate changes after a set period, typically either 3, 5 or 10 years. The rate when the mortgage expires the new rate is usually tied to an economic indicator. In most adjustable rate mortgages at expiration your “new” rate will not rise or fall more than 2% in any one year. However, they can continue to go up unless you are able to refinance into a fixed rate term. Adjustable rates can be more attractive than fixed rates as they are typically lower than a fixed rate. They do bring significant risk as you are only locking in this low rate for a relatively short period of time, many in the mid 2000’s found this out as these rates did go up with many unable to refinance due to lack of equity and stuck with a rising adjustable rate. The popularity of ARMs has dipped significantly over the past few years with the historic lows of fixed rate mortgages.
Is This the Right Time to Buy?
This is the question everyone asks me. Just like the stock market the real estate market is tricky to time. The honest answer is nobody knows what the market is going to do in the short term. However, history has shown us what the real estate market will do in the long term. It will appreciate. It will appreciate over an approximately 10+ year period. It always has. When considering if it is the right time for you to dive into the market think about these few items:
- Where will you be in 5 or 10 years? Home ownership is typically viewed as a long-term commitment. If you think you’ll move frequently for work or plan to relocate in the next few years, you probably don’t want to take out a mortgage just yet. However, if you plan to be in the area for a long period of time or plan to come back to the area, home ownership is a great investment.
- How much real estate can you afford? Think in terms of worst case scenarios.What would you do if you lost your job? Would you be able to find another job that pays at a similar level? Can you handle monthly mortgage payments? Simply put, make sure you aren’t “house poor” at the end of each month.
- What are your long-term goals? You and your fiancé may be looking at a one bedroom condo now, but what if you decide to have kids in the not too distant future? What are the schools like in the area? What are the home values in relation to other communities?
- Interest Rates: Rates are below 3% for a 30 year term mortgage. Even lower for 10, 15 and 20 year mortgages. These are very, very low numbers. As a comparison; in the 1980’s rates were in the high teens.
If you have been looking to buy a home for the last year or so you know how hard it is. I’m sure you have been told that getting preapproved for a mortgage before you start looking is the way to go, and it is. Getting a mortgage is a big financial commitment; however with interest rates at historic lows buying a home now is an attractive option. Yes, I know how difficult it is to find and secure a home and that home ownership can seem overwhelming, but if you don’t want to pay your landlord’s mortgage and want some tax benefits then plunging into the real estate market can be both financially and emotionally satisfying. Let me know if I can help. Thank you.
If you have any questions about this article, real estate in general or are looking to buy or sell a home please contact me, John McCarthy at Rowley Realty, 165 Main St., Rowley, MA 01969, Phone: 978 948-2758, Cell 978 835-2573 or via email at john@rowleyrealestate.com.
