Financing Do's And Don'ts

By Chelle Cordero

June 1, 2015 5 min read

It's the American dream, the pursuit of life, liberty, happiness and homeownership. Buying a home can be expensive, and many people fear that attaining that goal is out of reach. What can you do to afford a home of your own -- for comfort, for security and for status?

The median price to buy a home across the United States is almost $200,000. Depending on where you live, prices for an average home could be as high as $196,000 (Silicon Valley) or as low as $65,000 (Cleveland). Even at the low end, most of us need financing for this very important purchase. Applying for a mortgage is usually a nerve-wracking experience for potential homeowners.

As you begin your house hunting and financing journey, there are a few important steps to keep in mind. Find a home that is in your budget and located in an area that meets your needs in regard to employment, schools, family, climate, etc. Search around for rates and terms before settling on a lending institution to apply to. First-time homebuyers and special groups -- such as veterans, seniors and people working in emergency services -- are often offered special deals that might save you money and make financing seem more attainable, but always compare all offers for the best solution.

Generally, the shorter the term of your mortgage the lower your interest rate will be, making your final investment less expensive but your monthly payments higher, but there are factors to consider before deciding on the length of your loan. A 15-year mortgage might only cost you 4 percent. A 20-year might cost 4.5 percent. A 30-year mortgage might cost 5 percent. If you put down 20 percent on a $200,000 loan, or $40,000, you will need a loan for $160,000. A 15-year loan would mean a monthly payment of $1,199 and a final outlay of $215,859; a 20-year mortgage would cost $1,025 monthly and have a total cost of $238,500; and a 30-year mortgage would cost $867 monthly, with a final cost of $264,157. (Go to the website CalcXML for a calculator.)

Do your own research as to costs, terms and your ability to pay. Though a 30-year mortgage might cost you more in the long run, payments that are $332 less per month might be more feasible. Also, be sure to understand the exact terms, such as prepayment penalties, fixed versus variable rates, how often and how much your lender could raise or lower interest rates (if at all), and fees -- for example, points (a percentage of the loan amount). Some lenders or programs will offer reduced down payment options. Find out how much these would raise finance rates or whether it would be worth moving personal funds around to put down more money. Also find out whether mortgage insurance would be required for a low down payment. Your credit score will also be used to determine finance rates and terms, so find out what your score is.

Do an online search to compare home loan rates to get some realistic ideas of offers that might be available to you. Visit your local credit unions, banks and mortgage brokers before making any final decisions or applications to see what they are willing to offer. Be educated and willing to negotiate with a loan officer. If you are applying for a bridge loan while you sell your current abode and using the proceeds of that sale to pay down your new home, verify terms, rates and especially penalties if something were to happen to delay the sale.

There are recommended do's and don'ts before and while you are in the loan application process: Don't make significant changes to your financial situation -- e.g., getting a new job, getting a new credit card, taking out another loan or making a major purchase. Do make sure you have all of your documentation available for the loan officer, such as tax records, pay stubs, bank statements, list of debt and sales contracts for your current home/property (if applicable). If you are transferring jobs, bring that information, as well. Continue to pay your bills and your current rent or mortgage. Keep the loan manager informed of any sudden or unexpected changes to your finances during the process.

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