First-Time Homebuyer’s Guide: Part 6

Determining your rate, payment and term

You’re cruising along in Guaranteed Rate’s Intuitive Loan Finder and your confidence in the process is high. You have a firm grasp on why buying a home is right for you, as well as the self-assurance you can afford it after reviewing your finances.

This step is where you get down to business regarding your home loan’s monthly rate, payment and term. These are important elements to consider and the Intuitive Loan Finder makes it easy to arrive at a decision. Do you want the lowest interest rate, lowest monthly payment, or the shortest loan term?

Before you are properly equipped to answer, there are two other questions you should consider. The first involves your budget. What can you spend each month, factoring in the mortgage payment itself, plus assessments, insurance and taxes? You also need to consider how long you plan to live in the property. Will it be your home for the next couple decades or do you plan to live in it for four or five years and then upgrade?

Lowest Interest Rate

If you have a high credit rating and a low debt-to-income ratio (DTI), chances are you will qualify for a low interest rate. While you obviously want to secure the lowest rate, you need to be mindful of what you can afford each month.

For example, let’s assume you’re making a $60,000 down payment on a $300,000 home (20%). If a 15-year fixed loan shows a rate of 3.375%/3.484% APR (annual percentage rate), you’d have a monthly principal and interest payment (P&I) of roughly $1,700. If your budget tells you that your maximum monthly payment is $1,500, you’ll need to find another loan. Also, keep in mind that your P&I payment doesn’t include taxes, insurance or any applicable assessments. So, your total monthly payments will be greater. By comparison, using the same circumstances, say you find a 30-year fixed loan with a rate of 4.625%/4.689% APR. The monthly P&I payment will be closer to $1,225, a more manageable figure that fits your budget, though you’ll pay more in interest over time.

Pros: The lower the rate, the less you’ll spend on interest.

Cons: A lower rate could mean a shorter loan term and thus higher monthly payments.

Lowest Monthly Payment

A lower monthly payment can be achieved by a longer-term loan, but it also means more interest accrued over the life of the loan. And of course, the more of a down payment you make, the less your monthly payment will be. To this end, an adjustable rate mortgage (ARM) may be something to consider. The interest rate of an ARM changes after a fixed number of years (typically five or seven years). This is where the length of time you plan to live in the property comes into play. If you are confident that you’ll only be there a handful of years, an ARM may be right for you to lock in a low monthly payment and a low rate. If not, you run the risk of paying a fluctuating interest rate after the fixed term expires. That rate could decrease, but it could increase as well.

Pros: Monthly payments are more manageable.
Cons: More interest is accrued over the life of the loan and it takes longer to pay off.

Shortest Loan Team

A shorter term means fewer payments overall and less interest paid, both of which are enticing to any borrower. If you can afford the monthly payments, buying an ARM or considering a 15-year fixed instead of a 30-year fixed makes a lot of sense. This is where knowing what you can comfortably afford each month is a key factor to consider.

Pros: The shorter the term, the faster a loan is paid off. And, you could save significantly on interest.
Cons: Monthly payments will be higher.

Deciding What’s Best For You

Regardless of how much or how little you know about the mortgage process, you should have a firm understanding of your monthly budget and how much you can afford each month for a payment. Going for the lowest rate, lowest monthly payment or shortest term starts and ends with that figure in mind. And if you’re on top of your game financially, conversations with your loan officer will be that much more efficient and productive.

In next week’s First-Time Homebuyer’s Guide…

Part 7: Which type of mortgage — fixed or ARM — is right for you?



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