With the peak spring-summer home buying season in high gear, first-time home buyers are stressed. Finding that dream home in today’s market where affordability is beyond a challenge is often like winning the lottery. Especially for many who are suffering from “buyer fatigue.” Then once you find that ideal home, you should secure a mortgage that makes financial sense both today and for the future.
Here are some “insider” mortgage tips for first-time home buyers. Today, rates for 30-year fixed mortgages are at 4.29% and 3.67% for 15-year mortgages according to bankrate.com.
Apply For the Mortgage You Can Afford Today
“In today’s market, especially in Southern California where home prices are so high, first-time buyers can end up buying too much home. They may qualify for that mortgage but making that steep monthly payment will impact all other parts of their lives,” advises Miron Lulic, founder and CEO of SuperMoney, an online financial comparison platform. “When you’re committing to pouring you money into an asset like a house, you can put yourself in a tough situation and not have money left over each month to pay for other things like travel and savings,” Lulic observes.
“Asking the right questions when shopping for a mortgage is crucial. Failing to do so could cost you thousands of dollars,” Lulic cautions. Yes, filling out a mortgage application is painful, yet he suggests that should not stop you from applying for a mortgage from more than one source.
“It’s the same as shopping around for any large purchase you’re making. You need to apply for a mortgage and get competitive rates. Now with all the online sites you can quickly submit multiple applications to get an idea of the rates you’ll be offered,” Lulic says. According to Lulic, “more than one in three in for borrowers go with the first lender that gives them a quote.” You could save a significant chunk of money over time by comparison shopping.
Another word of caution do not immediately go with a lender your real estate broker recommends. Large national brokerage firms often have mortgage subsidiaries that may not offer the best rate.
Getting A Better Rate
“You may be surprised by the options available to obtain a more favorable interest rate. The obvious things you can do which may have lenders offering a lower rate is increasing your down payment and or reducing that key debt-to-income ratio,” Lulic said. Some fortunate first-time buyers receive help with down payments from their parents. If both parties are willing, adding parents as a co-signer can trim rates. “Increasing that down and adding a co-signer reduces a lender’s risk often resulting in a lower rate,” Lulic notes.
Buying Points For a Lower Rate
Buying points is a way lenders often draw borrowers to get their lower advertised rate. “This doesn’t always work to the borrower’s advantage. “It’s a way for lender to get interest revenue upfront instead of over a longer time period,” Lulic cautions. For example, if you buy $5,000 in points, you pay that upfront as opposed to paying that $5,000 out as part of your mortgage over time. “The lender will give you a lower rate but if you are not planning on staying in the house for a significant amount of time, it just doesn’t make financial sense,” Lulic continues. To figure it out, factor in the interest rate reduction and how long would it take to reach that break-even point if you bought points. Remember points are a form of pre-paid interest.
Understanding The Rate Lock
When a lender approves you and guarantees a mortgage rate, it has a specific time period until that rate lock expires. If something goes wrong during escrow and it looks like you may be late closing and funding will have to be delayed, you need to ask the lender and get it in writing on what happens specifically and where that rate goes to after the lock expires.
Now you are armed with important information on mortgage hunting. Do take it as seriously as you do finding that first dream home.