Financing Your New Home: A Guide to Financing Your Dream Home

Buying a home can be one of the most exciting — and stressful — moments of your life. However, when you are educated in the process and know what to expect, you can purchase a home and close with ease.

How to Buy a Home

There are many options for financing a new home, and these are detailed below:

 

Buying at Auction

Borrow Money at Auction

It is possible to buy a new home with cash by placing an offer in an online auction. You can purchase a home for a lower price by bidding on the home at an online auction. You can also purchase your home in an auction sale, but the bidding may be higher.

Research Auction Houses

Most auction houses have an online portal where you can learn more about bidding and bidding strategies, such as the price range you should be willing to bid at and when a sale should take place. You can also request information about the homes, and if you are qualified to purchase a home in the area, the auction house can tell you more about the homes available.

Down Payment

In the year 2016, the average American spent nearly $30,000 on a down payment. Although the average amount is the highest it’s ever been, it still comes in at only 3.2 percent of the price of the home. As of 2016, only 35 percent of first-time home buyers were able to put up 20 percent or more of the price of the home. When buying a home, it is essential to have a sizable down payment, and you can do that by either saving or borrowing.

If you have not saved enough for your down payment, ask your parents if they would be willing to invest in you or pay down your student loans. Although not common, there are alternatives to offering a deposit or cash down payment.

Loan Types

Although mortgage lending is still the primary source of financing for home purchase, there are several financing options you can pursue. Options include traditional mortgages, home equity loans and home improvement loans. Your home is a major investment and therefore, should be treated as such.

Generally, mortgage lenders approve applicants for loans based on their income, credit score, etc. The best lenders are qualified by both traditional lending standards and regulatory guidelines.

Home Equity Loans

Typically, a home equity loan is a second mortgage that allows you to tap into the equity of your home. The borrower purchases the home and puts 20 percent down, then takes out the equity that the borrower has in their home.

Fixed-Rate Mortgages

With a fixed-rate mortgage, you can expect to pay the exact amount of your mortgage for the life of your loan. This gives you greater peace of mind knowing that you can afford your payments over the long haul. There are only a handful of options for fixed-rate mortgages, and they will be tailored to your situation, so it is important to compare them to ensure you are getting the right one for you.

Fixed-Rate Loans and Mortgage Insurance

A fixed-rate loan with mortgage insurance makes sure you stay within your monthly budget, even if there is a large unexpected expense. Having insurance protects your home from going into foreclosure. However, it will cost you up to $10,000 to add it to your mortgage.

Adjustable-Rate Mortgages

Since rates have been low lately, you are able to save on your payments by taking out a fixed-rate mortgage.

Those who are using their cash or savings as a down payment can borrow on a 30-year mortgage. It is important to note that interest rates can change every month.

You should also be aware that you can borrow up to 80 percent of the home’s value. The higher the ratio, the less you will pay in interest.

Because of how the financial industry works, interest rates are increasing. That said, this does not necessarily mean that interest rates will continue to increase.

If interest rates start to rise, it is possible that rates could decrease again when the economy begins to grow again.

Interest-Only Mortgages

A conventional mortgage loan is usually for the purchase of a fixed rate home. The lender collects money in a fixed rate and makes mortgage payments based on the amount borrowed, therefore having the house remain in your name.

For a conventional mortgage, there is a certain amount that you are required to pay each month. This is called the principle and interest and is equal to the interest charged on the mortgage.

With interest-only mortgages, you only have to make the principal and interest payments for the duration of the loan, while you also make monthly mortgage payments on the interest. You pay less principal and interest than with a conventional mortgage and you are also rewarded for the loan in the form of a lower interest rate.

Closing Costs

When purchasing a new home, the first thing that you will pay for is closing costs. This money covers items like the real estate commission, title insurance, and recording fees. However, you may also be responsible for property taxes and homeowner’s insurance.

Home Loan Terms

Once you have your credit score in order, it is time to look at a home loan. A mortgage is a debt, and the amount you will pay back will determine the final price of the home you purchase. Typically, you will pay a monthly mortgage payment, and the monthly payment will include taxes and insurance on your home.

Potential Interest Rates

One of the factors that you will look at when purchasing a home is interest rates.

Mortgage Insurance Premiums

The first step is to understand the loan process. After you decide on a home you want to purchase, you will need to determine how much money you can borrow. You can either use a conventional loan or an FHA loan.

FHA loans are generally considered a better option because they require lower down payments and are lower on interest. If you use conventional loans, the lender will give you the money upfront, so it is the lender who sets the monthly payments. The mortgage payment will be made by the lender, not you.

To determine how much you can borrow, the lender will want to know your credit history. This is the key to determining how much mortgage insurance you will need to pay every month.

The mortgage insurance premium depends on your credit score.

Conclusion

A great mortgage is essential to completing your new home. The mortgage industry is a complicated one, and to make it simple, it is helpful to have the help of a qualified mortgage professional. When you are well educated about the entire mortgage process and how you should take your time, when to apply for a mortgage, and how to avoid unnecessary fees and delays, you can purchase a home and close on a positive note.

Your mortgage professional will help you and your family find a loan, stay within your budget, and provide you with expert support when it comes time to make your home purchase a reality.

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