First-Time Home Buyer Loan Information
Buying a home for the first time can be a daunting prospect. Finding your dream home is exciting but arranging financing for it can take time, effort and organization. Make the process less stressful by understanding how home financing works.
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Adjustable-Rate Mortgages
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There are several different types of mortgages. One of the most common is an adjustable-rate mortgage (ARM). An adjustable-rate mortgage is a mortgage that has rates that may rise or fall depending on prevailing interest rates. Many ARMs start out with a low initial rate. Rates may then be adjusted upwards after a period of time such as two years.
Fixed-Rate Mortgages
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A fixed-rate mortgage is a mortgage that has a set rate; the interest rate will not rise during the period of the loan. Most fixed-rate mortgages are set at either 15 or 30 years. A homeowner who starts out with a fixed-rate mortgage may find that interest rates have later fallen. If the homeowner wants she can apply for a new mortgage with a reduced interest rate. The new mortgage may have additional closing costs and fees.
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Pre-Qualification
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Before you go house hunting, find out how much of a home loan you can qualify for. You can get a rough estimate using online calculators. A traditional rule of thumb is the monthly costs should not exceed 40 percent of your take-home income. You should visit a bank in person to get a letter of pre-qualification. The pre-qualification document tells the home seller how much you can afford to pay.
Pre-Approval
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Instead of pre-qualification apply for a pre-approval. A pre-approval is a much more stringent form of loan qualification. Essentially buyers are completing almost all of the steps for applying for a mortgage. A pre-qualification is an estimate while a pre-approval is essentially an offer. Use a pre-approval letter to indicate to buyers that you can back up your offer with actual guaranteed financing. Be prepared to spend time documenting your finances for the bank. Bring copies of your paychecks, your partner's paychecks, and proof of any assets you own.
Additional Tips
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Be sure to take into account additional costs when calculating housing costs. Utilities, taxes and maintenance costs can add hundreds of dollars of expenses each month. You may have to pay a facilities fee to maintain the grounds of the house or apartment as well as association dues. First-time home buyers may also have to pay what is called PMI (private mortgage insurance). PMI is essentially an insurance policy taken out by the insurer in case you default on the home loan.
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