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Health & Fitness

Shopping for a House: What Kind of Loan to Choose

If you’re a first time home buyer, it might take you a while to understand all of your loan options, as you find the best fit for you. This article has a few pointers that will help you make a more informed decision about what kind of loan to choose when shopping for a house.

Buying a house is likely the biggest investment you’ll ever make. You have to take your time to carefully analyze all options available when it comes to financing your purchase and make sure to choose a loan that best fits your needs. When figuring out how much you can afford, keep in mind that most lenders suggest you spend no more than 28-percent of your monthly income on mortgage payments.

If you apply for a loan, you have to make sure you are going to be able to meet your payments every month and have enough money left to cover your other living expenses. Making a budget is your best bet; it will allow you to assess your current financial situation and determine if it’s the right time to make such a huge investment.

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According to Investopedia, most prospective homeowners can afford to mortgage a property that costs between 2 and 2.5 times their gross income. For instance, a person earning $100,000 per year should apply for a mortgage between $200,000 and $250,000. However, this calculation is only a general guideline. In the end, you are the only one able to assess how much you can afford to spend on your dream home.

Taking into consideration your income and regular expenses isn’t enough when trying to determine how much you should spend on your own home. Your lifestyle should also be acknowledged. Are you willing to make some sacrifices in order to move into the perfect home? For instance, if you aren’t sure whether you’ll be able to reduce the amount of money you spend on entertainment every week, maybe you should take a more conservative approach to that mortgage amount.

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Once you know the amount of money you can spare every month to pay for your mortgage, it’s time to shop around for the perfect loan. Here are some pointers on the four most common types of mortgages out there.

Fixed-rate mortgage

Fixed-rate mortgages are loans with a fixed interest rate over time, whether we are talking about 15, 20, or 30 years. When you choose a fixed-rate mortgage, your monthly payments will stay the same over the life of the loan. The main advantage of a fixed-rate mortgage is inflation protection; in case mortgage rates increase in the future, your monthly payments will not change. This is ideal if you’re looking for predictable payments over time. Nonetheless, keep in mind that your payment could increase based on changes to your taxes and insurance. These mortgages are usually more expensive than adjustable-rate ones, but they are easier to understand and provide the greatest payment stability.

Adjustable-rate mortgage

Adjustable rate mortgages usually start at a lower rate. However, your interest and monthly payments will fluctuate, depending on market trends. Typically, these types of mortgages are adjusted annually, although some may be adjusted more frequently, depending on your contract terms. If you are expecting a significant increase in income over the next few years, this type of mortgage may be your best option. According to Scituate Federal Savings Bank in Massachusetts, an adjustable-rate mortgage could be less expensive over a long period than a fixed-rate mortgage as long as interest rates remain the same or decrease. 

Balloon mortgage

If you aren’t sure about how much time you’ll be willing to spend in your home, or if you regularly move around, a balloon mortgage might be your best choice. These types of loans usually have a lower interest rate than a conventional 30-year mortgage. However, the loan is due in five to seven years. If you find yourself still in the house at the end of this term, you will have to look for another mortgage to pay off the first one. Balloon mortgages are ideal for people that like the stability of fixed payments, but aren’t able to afford a long-term mortgage. On the same note, such a mortgage can work if you plan on selling your home in a certain time frame.

Jumbo loans

If you’re looking to borrow an amount of money above conventional limits, you will have to apply for a jumbo loan. The standard is set by two government-sponsored enterprises, Fannie Mae and Freddie Mac – they decide the limit on the maximum value of any individual mortgage you can purchase from a lender. According to Bank of America, you’ll need a jumbo loan if you’re looking to mortgage more than $417,000. If you live in Hawaii or Alaska, the limit for a single-family home is $625,500. Jumbo loans usually have higher interest rates and stricter underwriting requirements than standard conforming loans, since they represent a higher risk for lenders.

As you can see, each type of mortgage has its benefits and drawbacks. If you still have doubts about which type would fit your needs best, you can contract the services of a mortgage broker. They will find a bank or a direct lender who offers loans based on your current needs or expectations. 

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