Mortgage Advice for the First Time Home Buyer

You know the old saying, buying a home, and getting a mortgage, is the most important financial transaction most people will make in their lives. It’s a cliché, but it’s definitely true. Get the wrong mortgage and you may find your finances spiraling out of control and into trouble. The right mortgage, on the other hand, can make homeownership much easier (and less of a strain on your finances). With this in mind, here are some quick mortgage tips for first time home buyers.

Before you Apply

Preparing to apply for a mortgage is perhaps the most important step in actually getting the loan. Preparation is all about tidying up your finances, and making sure your credit is in order before you start contacting lenders.

Fix your Credit: Your credit rating is one of the most important factors that lenders use to determine how much mortgage they’re willing to lend you, and what your interest rate will be. If your credit is in poor shape, you can expect a higher interest rate, and very poor credit may even prevent you from obtaining a mortgage at all. To start fixing your credit, pay bills on time and check your credit report for errors. Make sure your credit is in good shape before you start applying for loans.

Evaluate your Finances: This part of the process is all about determining how much mortgage you can afford. Make two lists: one of your monthly income, and one of your monthly debts. This will help you figure out your budget and how much you can afford in mortgage repayments. Of course, these are only preliminary figures, but it’s good to know where your finances stand before you start talking with lenders.

Choose your Mortgage Type: Fixed rate mortgages aren’t always the best option. If you’re only planning to live in the home for a few years, you may find an adjustable rate mortgage is more affordable. You can always refinance to a fixed rate mortgage if you decide to stay in the home permanently.

The Application Process

Applying for a mortgage is a fairly complicated process. For first time buyers there are several important points to be aware of. Here are a few tips to help you get through the application process.

Choose a Lender: When you’re choosing a lender it can be tempting to simply choose the institution that offers you the lowest rates, but it’s wise to be aware of the fact that unscrupulous companies have no intention of actually giving you the low rates they advertise. It’s much more important to choose a trustworthy lender who is willing to answer your questions and help when you need it.

Buy Points: Most lenders offer “points” as a means of allowing you to buy down your interest rate. This can be an excellent way of saving a significant amount of money over the life of your loan, but the money you pay for points has to be paid in cash at closing, so make sure your cash flow can cover this. Also note how much the lender is charging per point – in some cases, points can cost more than you’d save over the mortgage term so buying points doesn’t always make sense.

Lock in your Interest Rate: Locking in a low interest rate can save thousands of dollars over the life of a loan, but trying to ride the market waiting for it to bottom out can be risky. Don’t wait too long to lock in your interest rate, and pay very close attention to the market, or you may end up with a higher interest rate than you can afford.

Investigate Hidden Costs: Closing costs, which typically cost between three and five percent of the value of the home, are payable in cash when you close on the house. When you receive your Good Faith Estimate from your lender, check it thoroughly for hidden expenses, such as document delivery fees and processing fees. If you’re careful you can save hundreds of dollars in hidden costs by negotiating with your lender, which means less cash to pay at closing time.

Tips for Closing

Closing can be tricky too, especially if issues arise at closing time that weren’t apparent previously, such as the need for home repairs. These types of problems shouldn’t affect your mortgage, however.

One aspect of closing that can affect your mortgage is the date on which you close. This is because when you close, you must pay in cash the pre-paid interest that accrues on your first mortgage payment. This cash payment covers interest from closing time until the time you make the first payment. If you don’t have much cash to spare, close at the end of the month to reduce the amount of pre-paid interest owing.

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