As a first home buyer, you’ve likely already got a lot on your mind. Where are the best schools? Will the floor plan fit your family’s needs? How much extra will it cost you to buy appliances, window dressings, and upgrade the flooring? But you need to put all those questions on the backburner until you can answer the first – and most important – question of buying your first home: can I afford it?
In order to reach the answer to that question, you’ll want to sit down with a mortgage calculator as well as a mortgage professional to compare home loans.
Thinking Long Term
Mortgages come in all shapes and sizes, but generally speaking, the longer the loan’s term, the higher its interest rate. For example, a 40-year fixed rate mortgage will have a higher interest rate than a 5/1 adjustable rate mortgage, or ARM.
This gives you a lot of flexibility, but it also leaves you with the potential for uncertainty. Taking on a loan with a long term – like 30 or 40 years – will give you a stable monthly mortgage payment for decades to come, but at a higher cost up front. On the other hand, an adjustable rate loan with a shorter term can give you lower payments to begin with, as well as the risk that your monthly installments could skyrocket after the loan’s introductory period ends.
Doing the Math
That’s where a home loan comparison comes in. These in-depth estimates allow you to factor in everything from the home’s purchase price and your initial down payment to things like annual home insurance premiums and real estate taxes.
Let’s do a home loan comparison using two different home loan products. We’ll be buying our “sample” home for $250,000 with a 20 percent down payment, leaving us with $200,000 in principal to pay down:
- Product #1 – a 30-year fixed mortgage at 3.75 percent: You’ll pay $926.33 a month throughout the term of the loan to pay back the principal.
- Product #2 – a 5/1 ARM with an introductory interest rate of 2.75 percent, increasing to 5.25 percent after the first 5 years: For the first 60 months, your monthly payments would be $816 – more than $100 lower than with the 30-year fixed loan – but after that, your interest rate would vary depending on market values; an increase to a 5.25 percent rate would up your monthly payments to $1060, with the risk of going even higher.
Finding the Right Help
Part of being a first home buyer is soliciting the right kind of help along the journey to home ownership. Many novices erroneously believe that the home loan comparison and shopping starts and ends with their financial institution, but that doesn’t have to be your only option. Mortgage brokers work as a middle-man between you and the lender, helping match you up with products that fit your budget and your lifestyle. Because most mortgage brokers are only paid a commission from the lender you ultimately choose to work with, you won’t owe them anything out of pocket. It’s a great way to compare home loans in bulk, without monopolizing a lot of your time by visiting bank after bank for a quote.
Know Your Rights
Although there are federal laws protecting home owners from bad mortgage products, individual states also have separate laws that further work to help facilitate home ownership. States like Georgia have enacted fair lending legislation, while others have state-specific loan disclosure rules; still others have mandated who can and can’t apply for a license to be a loan originator, which helps potential homeowners avoid predatory lending practices.
This is another area where working with an experienced mortgage broker can be a real asset. These individuals know the laws – and your rights – where you live, and can help you cut through all the legalese to understand what’s really at stake.