What’s an ARM? What’s PMI? How do I get the best rate? We got you covered.
It’s the American dream but can seem daunting between saving for the down payment, understanding finance terms, and sifting through the tidal wave of information.
Downpayment. Start with saving for a down payment. Typically you need 20% of the price. So buying a home for $300,000 means you need to have at least $60,000.
PMI Insurance. What if you don’t have enough money saved for a down payment? You can still get a mortgage but you will have to pay PMI insurance. It’s a monthly payment added and will get waived once your mortgage reaches 20% of the value. Typically costs 0.5 – 1% of your loan amount per year. That same $300,000 home: could be $125-250 a month!
Pre-approved. Get pre-approved for a mortgage by a mortgage broker or your local bank. You don’t need to work with them but go through the process. Especially in a competitive market!
Credit Score. Know it, clean it up and fix mistakes before you get started. You need at least 700 to get a competitive rate. If your score is low, there are options. Find out before you get started. (LINK TO CREDIT SCORE EPISODE)
Amortization. Most mortgages are based on a 30-year amortization schedule. That means the loan payments: principal and interest are spread over 30 years. The typical loan is a 30-year fixed rate loan which means you have one interest rate for 30 years. Today’s fixed rate for 30 years is approx 5%.
Mortgage payment. Made up of principal and interest and taxes and insurance. Your annual real estate tax bill and homeowners insurance are added to your monthly payment so you don’t get into trouble and forget to pay.
ARM mortgage. Adjustable rate mortgage. Very popular. An interest rate that adjusts over time. Usually lower than a fixed rate mortgage. Typical is a 10-year ARM. That means that for the first 10 years, it is a fixed rate but in year 11 it goes up to whatever interest rates are at that time and be adjustable for the rest of the 20-year term. Based on a 30-year amortization. For example, a 10-year ARM is 3.5% and will be a 3.5% interest rate for the next 10 years but in year 11 if interest rates are 7%, it’ll jump up to 7% which is a much higher monthly payment. Only do it if you can plan to pay off the loan within that time period or definitely sell the house in that time period as well.
Can you pay it off faster? You bet! Many people add as little as $100 a month to their mortgage or even break it out over 2 payments in a month and that will cut years off the interest of the loan.