Understanding Home Financing

Let's talk about one of the biggest parts of buying a home: figuring out the financing.

Whether you've purchased a home before or it's been years since your last move, mortgages can be a little confusing. There are different loan programs, interest rates, down payment requirements, and expenses to consider.

And sometimes, it's hard to know whether you're getting a good deal or even asking the right questions.

You don't have to become an expert on mortgages, but I do think it's important to understand what you're signing up for.

Let's go through some of the things you'll want to know before buying your next home.

Where Should You Start?

If you're planning to finance your home, I recommend talking with a mortgage lender before we start seriously looking at houses.

A lender will review your financial situation and help you understand what you may qualify for, what your estimated monthly payment could look like, and how much money you'll need upfront.

But here's something I always like to remind buyers.

Just because a lender approves you for a certain amount doesn't mean you need to spend that much.

I want you to be comfortable with your monthly payment and still have money for the other things you enjoy doing.

We'll use the information from your lender to help establish a price range that makes sense for you.

How Do You Choose the Right Lender?

Not all lenders are the same, and I always recommend doing a little comparison before deciding who to work with.

You can get a mortgage through a bank, credit union, mortgage company, or mortgage broker.

And while interest rates are important, they're not the only thing you should consider.

Pay attention to how well the lender communicates with you. Do they return your calls? Are they willing to explain things you don't understand? Are they upfront about their fees and what you can expect throughout the process?

Buying a home involves deadlines, paperwork, and quite a bit of communication. Having a lender who stays on top of things can make a difference.

If you don't already have someone in mind, I'm happy to share the names of a few lenders you can speak with.

Ultimately, I want you to choose someone you feel comfortable working with.

What Type of Mortgage Should You Get?

There are several different types of home loans, and what works well for one buyer might not be the best choice for another.

Here are a few of the more common options you'll hear about:

• Conventional Loans: A common financing option that isn't directly insured or guaranteed by the federal government.

• FHA Loans: Government-insured loans that may offer more flexibility with certain credit and down payment requirements.

• VA Loans: Available to eligible veterans, military service members, and certain surviving spouses.

• USDA Loans: May be available for eligible buyers purchasing homes in qualifying rural areas.

You'll also hear about fixed-rate and adjustable-rate mortgages.

With a fixed-rate mortgage, your interest rate stays the same throughout the loan term. With an adjustable-rate mortgage, the rate can change after an initial period.

There are advantages and disadvantages to each, depending on your plans and financial situation.

Your lender can explain the differences, including what the loan will cost now and what could change later.

Do You Really Need 20% Down?

No, and this is something that surprises a lot of buyers.

Depending on the mortgage program and your qualifications, you may be able to purchase a home with much less than 20% down.

But putting less money down can affect your monthly payment and other loan expenses.

For example, some loans require mortgage insurance when your down payment is below a certain amount.

For many conventional mortgages, that means private mortgage insurance, commonly called PMI. Other loan programs may have different insurance requirements or funding fees.

We'll also want to consider how much savings you'll have left after purchasing your home.

I don't want you putting every dollar you have into a down payment and then feeling financially uncomfortable when an unexpected expense comes up.

Your lender can walk you through the different down payment options and explain how each one affects your overall costs.

What's Actually Included in Your Monthly Mortgage Payment?

When you're looking at homes online, you may see an estimated mortgage payment listed.

But that number doesn't always tell the whole story.

Depending on your mortgage, your monthly payment may include:

• Principal: The money you're paying back toward your loan balance.

• Interest: What the lender charges you for borrowing the money.

• Property Taxes: Often collected monthly through your mortgage payment.

• Homeowners Insurance: May also be included in your monthly payment.

• Mortgage Insurance: If your particular loan requires it.

And if you're purchasing a home in a neighborhood with homeowners association fees, those are another expense you'll want to consider.

Something else to remember is that property taxes and homeowners insurance can change over time.

So even if you have a fixed-rate mortgage, your total monthly payment could still increase.

That's why I think it's important to understand the full monthly cost of owning a home before deciding what you're comfortable spending.

What About Closing Costs?

This is another expense buyers sometimes forget to plan for.

Along with your down payment, you'll generally have closing costs associated with purchasing your home.

These can include lender fees, an appraisal, title services, and other expenses involved in completing the transaction.

You may also need money for prepaid expenses, such as homeowners insurance and the initial funding of an escrow account.

The amount will depend on your loan, the property, and the terms of the purchase.

Sometimes we may be able to negotiate for the seller to contribute toward certain closing costs, depending on the situation and your loan requirements.

Your lender will provide estimates so you have a better idea of how much money you'll need before closing.

I don't want you getting close to closing day and being surprised by expenses you weren't expecting.

Is the Lowest Interest Rate Always the Best Deal?

Not necessarily.

It's natural to focus on the interest rate because it affects your monthly payment.

But sometimes a lender may offer a lower interest rate in exchange for additional upfront fees, often called discount points.

That means you could be paying more money at closing to get a lower monthly payment.

Depending on how long you plan to own the home and keep the mortgage, that may or may not make financial sense.

When comparing lenders, ask about the interest rate, APR, fees, discount points, and estimated monthly payment.

You can also request a Loan Estimate from each lender after applying so you can compare the costs side by side.

And don't hesitate to ask questions if something doesn't make sense.

I would much rather see you understand the numbers before moving forward than realize later that something wasn't what you expected.

What Happens After You're Preapproved?

Getting preapproved is an important first step, but it doesn't mean your mortgage is completely approved.

Once we find a home and have an accepted contract, your lender will continue working through the loan process.

They may need updated pay stubs, bank statements, employment information, or other financial documents.

The home may also need an appraisal.

You'll probably hear the word underwriting during this process.

That's simply when the lender reviews your financial information, the property, and the loan requirements before making a final decision.

One piece of advice I always give buyers is to be careful about making big financial changes while purchasing a home.

Buying a new car, opening a credit card, taking on additional debt, or changing jobs could affect your financing.

If you're considering any of those things, speak with your lender first.

The last thing we want is an unexpected financing issue when you're getting close to closing.

What Happens Right Before Closing?

As closing day approaches, your lender will finalize the details of your loan.

For most mortgages, you'll receive a document called a Closing Disclosure at least three business days before closing.

This document outlines your final loan terms, monthly payment, closing costs, and how much money you'll need to bring to closing.

Take the time to review it carefully.

If something looks different from what you expected or you don't understand a charge, ask your lender to explain it.

And while your lender is handling the financing, I'll be staying on top of the real estate side of your purchase, including important contract dates, inspections, and coordinating the steps leading up to closing.

I want you to know what's happening and feel comfortable with the process from beginning to end.

Let's Talk About Your Home Search

If you're getting ready to buy a home, one of the best things we can do is make sure you understand your budget and financing options before we start looking.

We can talk about what you're hoping to find, where you'd like to live, and what your timeline looks like.

From there, we'll put together a plan and start looking for a home that fits what you're looking for.

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