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Buying a home is an adventure. About 39% of Americans — an impressive 99.3 million of them — plan to purchase a home in the next few years, according .
If you're one of them, your first step is to figure out . Then comes the search for a good lender and a great mortgage rate. And getting the best mortgage rate starts with knowing the answers to the six questions below.
Mortgages have either fixed interest rates or adjustable rates. lock you into a consistent interest rate that you’ll pay over the life of the loan. The part of your mortgage payment that goes toward principal plus interest remains constant throughout the loan term, though insurance, property taxes and other costs may fluctuate.
The interest rate on an can change over time. An ARM usually begins with an introductory period of 10, seven, five or three years (or even one year), during which your interest rate holds steady. After that, the rate may change periodically.
ARMs usually offer lower introductory rates. But your ARM rate can rise after the introductory period ends, causing monthly mortgage payments to go up — substantially, in some cases.
are fees borrowers pay to reduce the interest rate on their mortgages. One point is 1% of the loan amount, which typically reduces the mortgage rate by 0.25%, although the reduction can vary. If you take out a loan at 4.5% interest, you might be able to pay a $2,000 fee to reduce the rate to 4.25%.
When you pay discount points, you typically shell out thousands of dollars up front to save a few dollars every month. It takes several years for the monthly savings to add up to where they exceed the initial amount paid. This break-even period varies depending on loan amount, the cost of the points and the interest rate. It's often seven to nine years. If you don't plan to have the loan for that long, it's a good idea to skip the discount points.
are fees charged by the lender and third parties. Closing costs don't affect the mortgage rate (unless you pay discount points). But they do have an impact on your pocketbook. Closing costs usually amount to about 3% of the purchase price of your home and are paid at the time you close, or finalize, the purchase. Closing costs comprise various fees, including the lender's underwriting and processing charges, and title insurance and appraisal fees, among others.
You’re allowed to shop around for lower fees in some cases, and the Loan Estimate form will tell you which services you may shop for so you can reduce closing costs.
Before you settle on a mortgage, find out if you’re eligible for any special programs that make homebuying less costly. Many states offer help to as well as repeat buyers.
Each state offers its own mix of programs for home buyers. Many states offer often combined with favorable interest rates and tax breaks. Some programs are targeted geographically and others offer help to home buyers in certain professions, such as teachers, first responders and veterans.
Veterans and rural borrowers may qualify for loans that allow 100% financing, requiring no down payment. Other borrowers may qualify for mortgages that allow down payments as small as 3% or 3.5%. Here's a summary:
Here are tips for comparing loan offers: