Buying your first home can be an exciting and stressful experience. There are so many variables to consider when it comes to buying a house, which makes it difficult to know where to start. If you're thinking about buying your first home and want some guidance, this article will walk you through the process step by step.
Defining The Terms: What is a Mortgage?
Mortgage: Is a type of loan that allows you to buy a house. Your mortgage acts as an agreement between you and a lender that provides you with the funds to purchase your home. If you fail to pay the monthly payments on the mortgage plus the borrowed interest as agreed upon, then the lender can seize your house.
Interest Rate: Is the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding, it commonly has monthly capitalizations which means it affects the total amount of the money borrowed every month.
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Some factor may affect the interest rates for your mortgage, including the Federal Reserve's (Fed) interest rates, since they are tied to Treasury Yields, as well as the type of mortgage you aquire, your credit score, among other details.
Your Credit Score and Buying Your First Home
Lenders use your score to determine if you are a good risk or not, based on what percentage of the amount borrowed you pay back on time (and avoid late payments), as well as how much new credit you have applied for recently.
Having a credit score of 620 or higher is essential if you're looking to purchase a home. A credit score is a three-digit number between 300 and 850 that lenders use to indicate your trustworthiness with credit; in simple terms, are you good for the money you are about to borrow from them – which is essential when purchasing a home. The more money you make and the more trustworthy you are with repayments, the higher your credit limit.
If your credit score isn't high enough yet but still close enough where interest rates from other lenders seem reasonable enough—say 7% instead of 8%, which would put it within reach based on savings goals—then consider paying off some debts before applying so that when you do apply later down the line, they'll take those extra payments into consideration during the approval process.
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Mortgage Options for First-Time Home Buyers
There are many different kinds of mortgages available to first-time homebuyers, and each will have its own pros and cons.
One type of mortgage you may be eligible for is an FHA loan provided by the Federal Housing Authority or FHA. FHA loans require lower down payments than conventional mortgages, and they also allow borrowers to finance up to 6% of repairs into the initial loan amount.
Another option is a VA loan provided by the Veterans Administration, which allows veterans who are buying their first home or refinancing an existing one to take advantage of low closing costs (or no closing costs at all), as well as special protections against foreclosure by private lenders during certain circumstances such as unemployment or divorce.
Conventional loans are another type of loan that you could apply for when purchasing a home. These loans typically require higher down payments than FHA loans, but still provide competitive interest rates with comparable monthly payments based on your credit score and other financial factors such as debt load compared with income level.
Adjustable-rate mortgages (ARMs) are a great way to save money on your monthly payments. If you're purchasing a house that costs less than $250,000, an ARM is likely your best option. An ARM will have a lower interest rate than a fixed-rate mortgage and make it easier for you to afford the home of your dreams.
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However, ARMs do come with some risks: if rates go up quickly after you take out the loan, then your monthly payment might rise as well. This is why these types of mortgages are best if you are planning to stay in your home for a period of two years.
You can save money by buying a house that requires improvements, but it's important to consider how long you'll be living in the house. You might also want to take into account any repairs or maintenance costs you'll have while living there.
As with any major purchase, you'll want to do some research of your own before making an offer on a property. The internet is full of great resources for learning about mortgages— and there are several different types of mortgages that are right for different people at different times in their lives.
Tools You Can Use to Select a Mortgage
Mortgage calculators can be found online and will help you calculate your monthly mortgage payments as well as how much of a loan you'll be able to qualify for. Here are a few options for an online calculator:
There are many other options available online, including the two mentioned above. Speak with your realtor for a better idea on which tool would be the most helpful in your area.
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