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Financing 101

A home could easily be the largest purchase you make in your lifetime, so you should choose wisely. But, the choices don’t just end at finding the right home — purchasing and financing decisions can also seem overwhelming. Having the right information and understanding your options can help, so we’re breaking down everything you need to know from budgets and necessary documents to the different types of loans. 

Mortgage

While there are various financing options available, the most common is a mortgage: a home loan that is paid off over a period of time. Keep in mind that longer loan terms come with lower monthly payments and higher interest, while shorter loan terms bring higher monthly payments and lower interest. While most people opt for a 30-year mortgage, additional options include five-, 10-, 15-, 20- and 25-year terms. In addition to the length of the mortgage term, there are two different types of interest rates available for a mortgage: fixed and floating.

Fixed Mortgage

In a fixed-rate mortgage, your interest rate won’t change. Which means, you know exactly what your monthly loan cost will be throughout the loan period, no matter the length.

Floating Mortgage

Floating mortgages include interest-only mortgages and adjustable-rate mortgages (ARM) and are helpful for first-time buyers or buyers who expect their income to increase substantially over the loan period. With a floating mortgage, you could qualify for a larger loan and score a lower introductory rate during the first few years. While these benefits can be helpful, they can also turn out to be risky if your income doesn’t grow with the interest rate, so proceed with caution.

Lenders

The lender finances mortgages. Common lenders include banks, credit unions and non-institutional lenders. Plus, the Federal Housing Administration (FHA) is a federal agency that regulates the housing industry business and is the largest mortgage insurer.   

Conventional Lenders

Through conventional lenders, you may be able to get home financing with as little as three percent down. In addition to the down payment, you could also be required to provide Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP), if your down payment is less than 20%. This helps protect the lender from losing money if the house ends up in foreclosure.

Loan Application Process

Remember, getting approved for a loan can take several weeks and requires multiple steps and necessary documents, including pay stubs, W2 forms, bank account statements and tax returns. Lenders will determine your eligibility based on your credit, proof of employment and income, credit score, loan-to-value (LTV) ratio and debt-service coverage ratio (DSCR). 

Many home buyers choose to get pre-approved for a home loan before looking to better understand their budget and how much they can afford.

Closing Costs

When your home purchase is finishing, or closing, things could get a bit pricey. Associated costs could include anything from inspections to attorney fees and could amount to about 2-5 percent of the home cost. Negotiating is key here, as the lender could reduce fees or the seller could pay for a portion of the costs, and your agent can help.

An Owners.com agent can refer you to our preferred providers for services you may need while buying your home.

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