Before you choose a home, you must select a mortgage loan. How much home can you qualify to buy and how long do you intend to stay put?
A home is a long-term commitment. You make the best choice possible based on your current income and what banks are willing to lend to you. But you also have to see into the future. Do you see living in your home less than three or four years, or more than five or ten years? Are you likely to relocate for a job? Is the home you want spacious enough for a growing family?
Mortgage interest rates are priced according to your credit scores, debt-to-income ratios and income history, among other factors. If you have some blemishes on your credit, or haven’t established a lot of credit, you may not qualify for the best rates.
How much home you can buy also depends on the type of loan and terms you choose. A fixed-rate mortgage never changes so it’s a higher risk for a lender, and costs you more to obtain. You should get a fixed-rate mortgage if you plan to live in your home at least three years or longer.
While your payments for an adjustable rate mortgage may be lower initially, it poses more risk for you, as you could pay much more for the loan as the interest rate adjusts higher to future market conditions. An adjustable rate is best only if you plan to stay in your home less than the initial term of the loan, or if mortgage interest rates are declining from historically high rates.
If you want to save interest expense, you can choose a loan with a shorter term, 15, 20 or 25 years instead of 30 years. Your monthly payment will be higher, but you’ll build equity (ownership in your home) much more quickly and pay off your loan that much sooner because more of your monthly payment will go toward principal than interest.
Rates can change rapidly. To illustrate changing mortgage interest rates and their impact on your monthly payment, consider what a difference even a small rise in interest rates means to you. In January 2011, the median-priced home in the U.S. was $158,800, according to the National Association of REALTORS®. If you purchased this home in October 2010, you paid $787.72 a month, for total payments of $283,580.49, with $124,780.49 in interest over the term of the loan. The same home in mid-March 2011 cost you $830.29 per month, or $298,905.33, and total interest payments of $140,105.33. That’s a difference of $42.56 per month, and $15,324 over the term of the loan.
Mortgage interest rates, types of loans, terms, and qualifying standards all make a difference in whether you can afford the home you want to buy. Make sure your payments are comfortably within your means, and you’ll enjoy your home even more.
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