Often, the realtor that helps the clients find and choose a home realize that the majority of their clients will not have extensive experience in choosing a home loan, and will recommend a preferred lender. Many times this lender will be somewhat integrated with the realtor, sharing an office and having an expedited paperwork conduit.
However, it is not necessarily a good idea for a homeowner to accept the recommended company without research. This strategy could result in higher interest rates for the homeowner. It could also result in a higher-risk loan than the homeowner would otherwise accept. For these reasons, it is important to research the various types of home loans as well as the company that offers the loan. These are some of the considerations.
Up-front Costs: Down Payments, Points, and Fees
Many homebuyers are limited by the amount of the down payment they can afford. The down payment is a risk management device, which demonstrates the homeowner’s ability to save and manage money. It also pays down the capital, directly reducing the monthly payments. The amount of the down payment for conventional loans is often the highest of available home loans. At one time, they approached 30% of the home price. With the higher cost of housing today, the required down payment dropped in order to qualify more homeowners. Some lenders will offer conventional loans as low as 5%, but these often come with the requirement that the homeowner obtain PMI (private mortgage insurance), which raises the monthly premiums.
Because the government assumes some of the risk of the FHA home loan, the down payment requirements are generally lower. However, although more homeowners will qualify for an FHA loan than a conventional loan, the FHA loan carries many more rules and regulations. Some of these affect the outcomes of refinancing or selling a home, carrying significant associated costs. Deciding between a conventional loan and an FHA loan based on down payment requires a long-term family plan.
Points are a way to pay down the interest rates. They are like down payments in that they are a way to reduce monthly payments through an up-front charge. Like down payments, they also allow the homebuyer to demonstrate money management skills.
Fees add directly to the home price. For this reason, they should be considered separately from down payments and points. Many homeowners qualify their choice of loan provider by the total of the fees that the provider charges.
Interest Rates and Terms
FHA loans generally offer lower insurance rates than conventional loans. Once a homeowner has dealt with the down payment, the interest will be the most important financial factor. Many homeowners choose a home with payments they can barely meet. This is a high-risk strategy. It leaves the homeowner vulnerable to any changes or setbacks in the economy or in his or her personal situation. Potential homeowners should shop loans in order to choose the interest rates and payments carefully.
In general, a good strategy is to choose the longest term available. This allows for the lowest monthly payments along with the best chance of being able to maintain those payments. With this strategy, a homeowner can always pay off the home early. A conventional loan will generally offer better early payment options than an FHA loan.
Conclusion
Research the different types of home loans available for your financial situation, and then shop different providers for the best rates. This will help you control up-front costs, monthly payments, and loan risks.
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