Taking out a mortgage can be an intimidating part of the homebuying journey, especially if you haven’t applied for a home loan before. But don’t worry — our Home Guides make it easy to understand the process. Here are the top things you need to know about mortgage rates and how yours may be determined so you can house hunt with confidence.
Check Your Credit Score
An important piece of the mortgage puzzle is your credit score. Typically, the higher your credit score, the lower (or better) the interest rate you’ll be able to secure. Your loan options could be more limited if your credit score is lower. Make sure you plan ahead to give yourself enough time to improve your credit score if needed before applying for a home loan. Your lender will be able to help you understand how your credit score, along with other factors, impacts your interest rate.
Set Your Budget
Making a list of your expenses will help you determine how much you can spend on a mortgage. Look back at your checking account over the last few months to get an accurate picture of your spending habits. It’s also important to remember your monthly payments will include more than just paying interest. You’ll also have to factor in the principal, property taxes and homeowner’s insurance, among other items.
Common loan terms are 15 and 30 years. There are other options out there, but the bottom line is that your loan term affects your monthly payments and interest rate. According to the Consumer Financial Protection Bureau, shorter term loans have higher monthly payments than longer term loans, but have lower interest rates and a lower total cost. Finding the right balance between how much you want to pay on a monthly basis and how long you want your loan to last is a good starting point.
The main difference between fixed and adjustable interest rates is whether or not your rate can change. According to the Consumer Financial Protection Bureau, with a fixed interest rate, you’ll likely pay the same rate for the entire length of the loan. While this typically means a higher interest rate, it also means you’ll know what you have to budget for every month for principal and interest. On the other hand, adjustable interest rates will be lower to start but will change every few years. Because they’re more unpredictable after the fixed period ends, it helps to make sure you’re saving money along the way to account for bigger adjustments.
The Consumer Financial Protection Bureau explains that a loan falls into one of three categories: conventional, FHA or special programs. As the name implies, a conventional loan is the type of loan most people get. Individuals who have lower credit scores or can’t afford a large down payment may qualify for an FHA loan, which is regulated by the Federal Housing Administration. Lastly, there are special programs in place for veterans and low- to moderate-income families to secure a loan. Please contact your lender to determine which loan type is right for you.
If you can’t afford a big down payment, such as 20% of your purchase price, your lender may require you to have mortgage insurance or PMI (private mortgage insurance). This protects lenders if you fall behind on payments. Mortgage insurance will increase your monthly payment, but it can help you qualify for a mortgage you otherwise may have been unable to get.
Have more questions about mortgages? No problem. Our Home Guides will help you step by step from initial meeting to contract. Get in touch with a Starlight representative and schedule an appointment today.
*See terms and conditions for complete information. For informational purposes only, not to be construed as quote or offer of credit. Starlight Homes is not a lender or mortgage broker. Programs, prices, rates, terms and conditions subject to change without notice. Actual rates may vary. Supply of homes and homesites at these prices are limited and subject to availability. All loans subject to credit approval. Other restrictions may apply.