Buy Your First Home by Qualifying for a Cheap Mortgage Loan

Do you want to buy your first home?

There is probably no person in the planet who does not want to have his own home. The desire to have a home can be a very strong motivating force for someone to work really hard and save up enough money.

Is it difficult to buy a home? It will be if you do not have the means to pay for it. But if you make the necessary preparations, you should be able to find and buy a home that you like.

Having a real estate broker or a lender should be helpful especially since you do not know much about purchasing a house. They can help you take out a mortgage that will help you purchase your very first home.

What is a mortgage and how does it work?

A mortgage is a loan that you take out to buy a home. Your house then functions as the collateral for the loan.

The reason people take out loans is not everyone has enough money to pay for a house in one go. By having a loan, anyone will be able to spread out the payment for the home. Instead of paying for the house right then and there, you get to pay for it in a span of several years.

It works this way:

When you plan to buy a house, you approach a bank or mortgage lender and apply for a loan. Based on your qualifications or your ability to pay off the loan, you will be awarded with a mortgage.

This loan, where 80% is the amount of the home and the rest is interest, will have to be paid over a set period. Loans can be paid within 30 years. Typically, the lender and the borrower will get to determine how long the loan has to be paid.

Failure to pay back the mortgage loan can lead to foreclosure, a procedure where the lender can take away your home.

What are the different types of mortgages?

Typically, there are 2 types of mortgages: fixed-rate and adjustable-rate mortgage loans.

Fixed-rate mortgages are those whose mortgage interest rate remains the same throughout the term of the loan. 30-year fixed rates are among the most common types of mortgages homebuyers apply for. There are other options like 15-year fixed rates and convertible mortgages.

This offers homeowners predictability. Since they know how much they are going to pay, they will be able to prepare for it no matter how much their financial circumstance changes.

One downside to this kind of mortgage is that it can be more expensive than adjustable-rate mortgage.

Adjustable-rate (or variable rate) mortgages are mortgages that adjust depending on the current rate. This means the mortgage rate can fluctuate depending on how the market does. It can go up or it can go down.

These mortgages became popular when fixed-rate loans were hard to qualify for. This is advantageous to certain types of borrowers who may have a little difficulty qualifying for conventional mortgage.

The downside to this is that you may end up paying more when the rates increase. And if you are looking for a cheap mortgage loan, this may not be the safest choice for you.

How can you find the best mortgage loan for you?

The simplest answer to finding a cheap mortgage loan is to work with a really good mortgage broker. A broker is someone who has the knowledge, skills, and experience in helping you get a mortgage loan application approved.

Mortgage brokers know a lot of lenders. That means they can bring you to different lenders who can offer you a good mortgage deal. It’s up to you, with your broker’s guidance, to choose which among the deals is suited for you.

Can you get approved for a cheap mortgage loan?

Of course you can get approved for a cheap mortgage loan. You just have to make sure you are working with a good mortgage broker.

Aside from that, you have to ensure you meet most, if not all, of the requirements that lenders impose. You must prove your employment and your credit score must be favorable.

Don’t worry if you have some problems with any of the requirements because your mortgage broker will help you smoothen out any problems.

Once you have done all these, you will be able to buy your first home.

Mortgage Rates and Factors That Move Them

Mortgage rates come in different varieties as you may know. Fixed rate loans are usually most popular due to the fact that you don’t have to worry about rates going up on you over time. Currently in July, 2014 rates are still down near historic lows, although they were even lower last year. The amortizations come in 30 year, 25 year, 20 year 15 year and 10 years with most lenders. The big price break is going to be with a 15 year loan. Currently the spread between the 30 year fixed and 15 year fixed rate is 3/4%.

For those who intend to hold onto their home for the long term, and not sell in the near future, the fixed rate mortgage may be the best option. However, for those who are fairly certain that they will be selling in the not too distant future, the hybrid ARMs such as the 5/1, 7/1, and 10/1 ARM could be a better option.

The spread between the 7/1 ARM and the 30 year fixed is also about 3/4 %. (4.375% VS 3.5%) So going with a 7/1 ARM will lock in your rate for the next 7 years and you don’t need to be concerned about rates rising. Here in the summer of 2014, rates are still down, but they will not be down forever.

Mortgage rates are normally quoted in 1/8% such as 4.125%. However, when you see a rate like 4.258% this is the annual percentage rate (APR) for the quoted rate. The APR is usually higher than the note rate when the loan contains closing costs which are being financed into the loan.

So what causes rates to go up and down? Although there are many factors affecting the movement of mortgage rates, probably the best indicator is the 10 year treasury bond yield. This is due to the fact that for most people, a 30 year fixed rate mortgage is paid off within 10 years either from the sale of the home or refinanced. Treasuries are also backed by the “full faith and credit of the US” which makes them a benchmark for other bonds as well.

Normally when the T-bond yields go up, mortgage rates also go up and vice versa. They may not go up exactly the same as yields though. There are also many reports that affect mortgage rates. The Consumer Price Index, Gross Domestic Product, Home Sales, Consumer Confidence, and other data on can have a significant effect.

Normally, if there is good economic news, rates will go up and with bad news rates will move down. If the stock market is rising mortgage rates will usually be rising also since both rise on positive economic news. Also when the Federal Reserve adjusts the Fed Funds rate, mortgage rates can go up or down. If it is a growing or inflationary economic pattern then rates will rise.

During the processing of your mortgage loan, normally your broker will lock in your rate for you to protect you in case rates rise while your loan is being processed. Locks go from 15 to 45 days with most lenders. This gives the broker enough time to process your loan and get it funded.

Keep in mind that the interest rate on your loan may be adjusted for various factors. Do not be taken in by a par rate. If you are doing a loan at a high loan to value (LTV) and you have a lower credit score (<700) there will be adjustments to your rate. The par rate is the rate at which the lender who is funding your loan neither charges or credits back any rebate to the broker. By picking a rate above par, you will receive this lender credit and it can be used to assist in paying your closing costs and prepaid expenses such as property taxes, hazard insurance, or interest.

Fixed Or Adjustable – A Mortgage Loan Dilemma

Let’s clear the air: Adjustable rate mortgages are not bad. Yes, they’ve gotten a “bad rap” over the last year because people tend to associate adjustable rate mortgages with recent housing woes plaguing the nation but the loans are not the cause of the nation’s real estate crisis; misunderstanding and misusing them is. The reality is that adjustable rate mortgages can, in fact, be an excellent mortgage loan option IF you fully understand how they work. So, with that said, it’s time to learn.

Who is eligible for an adjustable rate loan? As with any mortgage loan, anyone can apply. However, adjustable rate loans do tend to be more appealing to those who deal with budgeting changes well and those who don’t plan on living in a specific house for more than three to five years. Why? Keep reading…

What exactly is an adjustable rate? An ARM is one of the two most popular mortgage loan types offered in the United States. As the name suggests, the mortgage loans are called adjustable because the rate of the mortgage loan changes periodically-most commonly every six months. Mortgage loan firms often abbreviate “adjustable rate mortgage” with “ARM.”

How do ARM’s work? The process for obtaining an ARM is the same as any other loan type. You must apply for a mortgage loan and then, based on your credit standing, a mortgage loan officer will process your information to determine which lenders are willing to fund your mortgage. In most cases, loan officers will present you with multiple home loan options-ARM and fixed-rate mortgages.

Why do people choose the adjustable rate loan type? The simple answer: The numbers associated with ARMS always look great! In fact, they’re nearly too good to be true…but they are true. The interest rates are low and the monthly mortgage payments are manageable for a much larger percentage of the population than fixed rate loans.

When is an ARM a good idea? Typically, ARMs are best for homebuyers who plan on living in a home for just a few years. The reason: Most ARMs are for 5-years or less; after that time, the ARM typically converts to a higher interest fixed-rate mortgage loan. ARMs can also be a good alternative for real estate investors who cannot obtain an interest only loan for an investment property.

Though anyone can apply for an adjustable rate mortgage loan, whether it’s the best type of loan is completely dependent upon the homebuyer. That’s because the continuous changing of the mortgage interest rates and subsequently, the mortgage payments can be a financial stress for some homebuyers. The ARM becomes even more of a stressor once the ARM matures and the mortgage loan interest rate spikes.

So, what’s the alternative to an adjustable rate mortgage? A fixed rate mortgage of course.

Like ARMs, the name says it all for fixed rate mortgages. Fixed rate mortgages maintain the same interest rate through the life of the loan and therefore, the same mortgage payments. However, there is a tradeoff for that predictability: higher interest rates. That’s why those who plan to stay in a particular home for three or more years often prefer fixed rate mortgage loans.

In the end, the key to determining which type of loan is best-fixed or adjustable-is about mathematics and lifestyle. If you’re on a limited budget but expect your income to increase substantially in each of the upcoming years, an adjustable rate mortgage may be the best option for getting you into a home sooner rather than later. However, if you’re uncertain about if or how your income will fluctuate, it’s best to play it safe and opt for a fixed rate loan. That way, your mortgage payment won’t be a surprise, regardless of what the economy is doing. Of course, if you base your home mortgage loan choice on a mortgage payment that you can afford comfortably based on your current financial situation versus trying to “figure out how to make things work,” either type of loan will have you in your dream home in no time.