You have decided you want to move to a new home. That’s wonderful. Your first step needs to be looking at financing and talking with a lender. As a Realtor, I know several lenders in the city and can recommend one if you would like, but my number one piece of advice will always be to find someone local. A local lender will be able to help you through the home buying process in ways that an online lender or a lender from another city will not. Alright, off my soapbox.
Your first step is to talk with a lender and obtain your pre-approval letter. This letter will help you greatly in the negotiation process and open many doors to homes that you would otherwise not have access. Some sellers will not talk to a buyer or allow their home to be shown if they are not pre-approved and no-one will accept an offer from someone without a pre-approval letter. Obtaining a letter is an easy process and does not commit you to take out a loan even if you do find a place that you decide you want to purchase, it only serves as proof that the lender is willing to loan the money to you and in what amount if you are to present them with a home you want to purchase.
Now, about that home, and the loan. There is a lot of math involved in calculating the interest rates and with how often they change it would be impossible for me to provide you with a reliable way to estimate your loan amounts, but there is some information you can identify. Let’s look at the cost of the house as being 100% of value the House and equal to the appraised value of the house.
The lender will offer you a loan that is either 80%, 90%, or 95% of the value of the house for several years (30 is common). You choose the 90% loan (because it’s in the middle) and are told that the interest rate will be 3.25% (a number I made up because it’s close to a real interest rate). They will then ask you if you would like to pay for “Discount Points” to lower your interest rate. The short of it is you are paying your interest upfront in exchange for paying less over the life of the loan which may not seem like much at the time but the difference between 3.25% and 3.0% on a $200,000 loan is $9,794. Average costs for discount points on this loan would have been $4,000 for 2 points and a savings of $5,794 over the life of the loan.
But sometimes cash on hand is not as available as credit. In these cases, a 95% loan with 5% down may be the better option with higher interest rates. The cash saved can then be used for closing costs and home improvements after moving into the new house. If you choose to go this route then be aware that you’ll enter the realm of Private Mortgage Insurance. This insurance is purchased by you but ensures the bank’s interest in the loan. Let me say that again. You pay for the insurance but if the insurance pays out, the bank gets the money. This is insurance so that if you are unable to pay back your loan that the bank will be able to cover the difference between your home as collateral and the loan.
These are all reasons to talk with a lender before setting your heart on a home. It is important to know what your budget is going to be when you start searching so that when you do find the right place you can place an offer and know your lender will back you up.