For many, the American dream still entails owning a house and having a family.
In about four months’ time, the average person can become a homeowner and the average baby can start teething. Done wrong, both can be painful and headache-inducing.
But careful consideration of all your financial options can take the bite out of buying a house.
For those who don’t buy in cash, a home’s total cost is dependent on how it’s financed. It can also depend on what kind of lender you choose. Choosing wrong can cost money and time in an already-stressful situation.
“Don’t just go for the price,” says Sanjiv Das, chief executive of Caliber Home Loans, a Dallas-based direct lender. “Speed, certainty and rate are all important—not just the rate.”
As you consider lenders, experts advise doing your own research into the licensing of financial-service providers to avoid getting scammed, seeking out specialized lenders with expertise specific to your situation, and assessing your comfort level with online transactions as opposed to in-person conversations.
Especially if you are considering a smaller lender, it is critical to understand what you’ll get from the other side of the transaction. Less-regulated lenders have been making a comeback after the financial crisis, and while they often provide more-specialized lending options, they could also leave you more exposed to changing market conditions.
Like other loans, interest rates on home-financing options will depend on your credit score. The type of mortgage that fits your situation best will hinge on what you can afford up front and each month.
Fixed-rate mortgages are still the most straightforward options. Since 2010, 30-year mortgage rates have stayed within 2 percentage points on a week-to-week basis, according to data from Freddie Mac. But even differences of that size can amount to tens of thousands of dollars over the lifetime of a loan. And while consistency is generally rewarded in fixed-rate terms of both 15 and 30 years, your personal rate will depend on whether the amount you borrow falls under a conventional loan or a jumbo loan.
Adjustable-rate mortgages, like fixed-rate mortgages, typically require a down payment of approximately 20%. While the ARMs typically have lower starting interest rates, they can change over the lifespan of the loan. In most cases, the interest rate on a five-year ARM can increase or decrease by as much as 5 percentage points, meaning a borrower paying 3.83% could end up pay nearly 9% if the rate is adjusted.
But prospective homeowners may want look beyond the traditional mortgage structures to other types of loans if they wish to pay less upfront.
Federal Housing Administration loans—and other government-insured loans—offer much lower down payments than fixed or adjustable-rate mortgages. The FHA currently requires a down payment of only 3.5%. But over time, the required payments for mortgage insurance can add up and make these loans a pricier option, as you end up paying for the price of accessibility.
From private lenders, a piggyback loan is another common way to lower the cost of a down payment. By opening separate loans on the house, you can often cut the upfront cost to 10% of the house. However, piggyback loans double the number of monthly payments you have to make and down the line can double the closing costs on the loans too.
Finding the correct mortgage requires careful consideration and often necessitates consultation with a financial professional, as each situation is largely unique. These options account for only a fraction of the options prospective homeowners have.
For example, many younger buyers have found ways to finance the purchase outside traditional methods, especially when purchasing their first house.
Shared-appreciation agreements allow home buyers to sell a share of their home’s future appreciation, a maneuver aimed at reducing the personal risk a home levies on its owner.
Other prospective homeowners have crowdfunded the money for down payments from friends and family, an option that is now being offered from startups and established players alike. Data reviewed by The Wall Street Journal show that more than 26% of mortgage borrowers using FHA loans had assistance from a relative on their down payments.
However a home is financed, it’s important to remember that buying a house is often an emotional purchase, which can have a negative effect on financial prudence. Focusing on certain details of the buying process can cause you to lose track of the bigger picture of buying a home, a yearslong financial commitment
Understanding your financial obligation begins with understanding the moving parts. Using a financial professional can help you minimize the pain—even if you are only cutting your teeth with the home buying process.
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