Five financing do’s & don’ts for homebuyers.
You already know buying a home is expensive. And the process can be both overwhelming and complex, particularly when it comes to financing. But the more you know, the more confident you’ll feel with the journey and the decisions you make. These five tips can help you build a solid information foundation for your homebuying experience.
Do budget beyond the mortgage payment.
When determining how much home you can afford, don’t look just at the purchase price. For ongoing budgeting, it’s important to realize that your mortgage payment will typically cover monthly costs for principal (your loan balance), interest, property taxes and home insurance. It may also include private mortgage insurance (see below). In addition, it’s a good idea to plan on setting some funds aside every month for home maintenance and repairs.
Don’t get stuck on 20% down.
If you can manage a 20% down payment, great! But if not, you have options. For instance, Federal Housing Administration (FHA) home loans have down payment requirements as low as 3.5%. VA (Veterans Affairs) home loans require no down payment for qualified borrowers. Some mortgages also let you build your down payment using financial assistance from family members.
Don’t panic about private mortgage insurance.
If you do put less than 20% down, you’ll likely have to pay private mortgage insurance (PMI), which helps protect the lender in case you’re unable to make your payments. You pay for PMI as a monthly fee added to your overall mortgage payment.
You can expect to pay about 0.5% to 1% of your loan amount annually. While this increases your monthly mortgage payment, the good news is that most people can cancel PMI once the mortgage balance reaches 80% or less of the home’s purchase price.
Do consider discount points.
Purchasing “discount points” at closing can lower your interest rate. You’ll usually pay 1% of the loan amount for one point, which typically lowers your rate by 0.25%. You need to weigh the interest savings you’ll enjoy over the additional upfront cost to determine whether buying points is worthwhile. Not all lenders offer this option.
Don’t overlook adjustable rate mortgages.
Both fixed-rate and adjustable rate mortgages (ARMs) have advantages. With a fixed rate, you enjoy the stability of a never-changing interest rate for the life of your mortgage, meaning your principal and interest payments will stay the same, too. ARMs usually have a lower initial rate than fixed-rate loans, and that rate may be locked in for three to 10 years. After that period, though, the rate could change, meaning your payments could potentially increase.
To learn more about home financing in general and the specific options available to you, contact our Mortgage Concierge Team at 816-234-2600 or allthingsmortgage@commercebank.com. We’re here to help make your homebuying journey as smooth as possible!
