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As unbelievable as it may seem, not everyone has the funds to go out
and buy a home without any sort of financial help. Unfortunately, however,
in actuality, that is not so unbelievable! But don't feel discouraged
that you can't afford that perfect home just slightly above your price
range, because with a mortgage, you may suddenly own that home you never
thought you'd be able to pay for (and don't worry, you will pay for it).
Don't get too carried away with the dream home, though. When it comes
time to meet with your friend, the mortgage lender, he will typically
give you an idea of your expected mortgage payments by calculating 28%
of your income (or 36% of your income when those mortgage payments are
added on to the other monthly debt payments). This qualification ratio
(ratio of mortgage payments to total income) will determine what you truly
can or cannot afford. The factors that determine your total mortgage cost
are the length of the term, the interest rate, and the amount of points
that are paid. A point is a payment made at the closing of a loan that
is equal to one percent of the loan amount. A lower interest rate results
as the advantage to paying points.
The next step in the process is to figure out your budget and really
get it under control. You want to be able to get the best home possible,
and taking control over your budget will allow you to avoid wasting money
(which means you can put your newly saved money towards your new home).
Pay off any small debts completely (pay off the whole thing, rather than
just the minimum payment if you can). You want to go into your new mortgage
with as little extra debt as possible! Closing costs (typically an extra
2-5% of the mortgage amount that must be paid in cash upon closing) are
another factor to remember to include when calculating your budget.
Having important documents ready on hand will make for a much smoother
process.
Some of the items you will be expected to have are:
- W-2's
- Income tax returns (for the last few years)
- Any support payments (that are either paid or received)
- Bank statements
- Pay stubs
- Credit report
Do your research before agreeing to any one mortgage fund.
There are many different sources out there (banks, credit unions, mortgage
brokers, Internet services, etc.) and you should compare a few to really
find the one that suits you best.
Is term length really worth thinking about?
Term length is absolutely a factor that ought to be taken into consideration.
For instance, it may seem as though the faster you get the payments out
of your hair, the better. However, sometimes 15-20 year terms are actually
significantly more economical and have the potential to secure you an
even nicer home than you would have been able to afford otherwise. If
you still feel unsettled by paying over a longer period of time, a reasonable
option may be to arrange for the creation of a 10 and 20 year amortization
sheet. With this method, you will have the option of paying the mortgage
at the shorter term period as long as you are financial capable at the
time.
For a short term home (you will be living there for less than five years),
Adjustable Rate Mortgages (ARMs) may work to your advantage. An ARM will
leave you only paying the lower initial rate since you will have already
moved by the time rate increases occur.
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