Buying a home is a huge life event and taking out a mortgage on it will be one of the scariest parts of it. It’s a lot of responsibility to take on and if it’s your first time getting a mortgage then, naturally, you’ll want some advice from those who’ve done it before. But hold on! Just because Uncle Bill’s advice worked for him 20 years ago doesn’t mean it’ll work for you. Friends and family who offer advice on getting a mortgage may mean well, but the fact remains that the rules of home financing change almost every year. What were yesterday’s tried truisms could be today’s dead end. Here’s a fresh take on mortgage advice and what you might want to ignore.
Get a mortgage with a fixed interest rate
Most people assume that a 30-year fixed-rate mortgage is the way to go. It allows for lower monthly payments and provides the stability of knowing that your interest rate will never change. But buying habits have changed in the last few years. Before, people usually bought their forever home right out of the gate. But these days most buyers are getting a starter home that they plan to sell in a few years and use the proceeds to leapfrog to a bigger home. If this is what you see yourself as doing, then you should seriously consider getting a five-to-seven-year adjustable-rate mortgage (ARM).
It may allow for easier monthly payments and you’ll most likely sell your home before the rates adjust. Take a close look at where you are now and where you want to be in five-to-ten years. An ARM might be the way to go. Make sure you read up on the pros and cons of both options before deciding.
Make a 20% down payment
Another bit of advice that’s now a little outdated is that you need a 20% down payment. This may have been considered the only acceptable offer a few years ago but it’s not always the case. There are now far more mortgage programs on offer and a lot of these allow for down payments of only 10% or even just 3%. Take the FHA loan for example. With this program, you can secure financing with only about 3% down. Also, since it’s backed by the federal government you won’t have to take out Private Mortgage Insurance (PMI).
So long as you have a solid credit score you shouldn’t have any problem with securing a mortgage on favorable terms. Talk with your lender about the different mortgage programs on offer. You may find that your homeownership dream is closer than you think.
Wait for interest rates to drop
Interest rates always cause a little anxiety. The conventional wisdom says you should wait for them to drop, but in 2019 that may not be the best choice. At present interest rates are at their lowest in years. Meaning that if there was ever a time to buy a home then it’s now. Interest rates fluctuate often and are out of your control, so it’s probably better not to fret too much over them. Ask your lender about a rate lock and when it will start so you can be sure of getting one you know you’re comfortable with.
Meet with the lender in person
Just as personal banking has changed a lot in recent years, so has mortgage financing. Nowadays it’s very easy and safe to apply for a mortgage online from the comfort of your own home. The last five years have seen a whopping increase in borrows who made their full mortgage application online, as much as 43% according to Ellie Mae’s recent Connecting with Borrowers Online study.
However, don’t take this to mean you should leave out any human interaction at all. Meeting your lender in person is still a great way to get your questions answered and provide a little comfort from a face to face interaction. Just know that you can easily submit your documents online and save yourself the hassle of scheduling a meeting.
Pay off your mortgage as fast as you can
Everyone wants to pay off their mortgage early. After all, if you can pay off a 30-year mortgage in only 20 years that’s 10 years without a monthly payment. Not to mention the savings you’ll also make on interest. Well, not exactly. Paying it off early might sound like you’ll be saving money, but that is until you consider inflation. Due to inflation, your mortgage becomes cheaper to pay over time. The value of your money will erode but your mortgage payment will remain the same. This effectively means that any savings you make on interest by prepaying are effectively negligible. Then there are the tax breaks you’ll be missing out on if you prepay it.
Lastly, you have to consider the investment potential of that money you might otherwise use to pay down your loan. With interest rates so low now you have much more to gain by investing that extra money rather than using it to pay down your premium. If you feel unsure about this then talk with a financial planner to see what your best options are.