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Buying a New Home or Refinancing? Read This First!

Posted on Friday, May 27, 2022
by AMAC, D.J. Wilson

Buying a home is an important live changing and financial process that requires thought and research. This often involves obtaining a mortgage. Essentially, mortgages are loans from banks or financial institutions that allow people to borrow money to buy or refinance a home. Generally, the lower your mortgage rate, the more money you’ll save in the long run on the purchase of a home. When mortgage rates drop, people can generally afford to buy more expensive homes than they could if rates were higher. Mortgage rates are predicted to rise over the next six months, and the economy, timing of a home purchase, credit ratings and such can influence qualifications to buy a home. Some loans are backed by the government, such as a VA loan, and some are not. Others may be backed by government-sponsored enterprises. A standard down payment, or cash you need upfront to buy a home, is required. A 20% down payment is often used as a “threshold” for requiring mortgage insurance on conventional mortgages. However, down payment amounts may vary based upon the type of loan and lender requirements, as well as a person’s credit score. More money down can equal lower monthly payments plus less interest paid over the life of the loan.

Mortgage interest rates are slowly rising due to pressures to contain inflation. Currently, as of 5/23/22, the average 30-year fixed mortgage rate was 5.87%, 15-year fixed was 4.779%, and 10/6 ARM was at 6.6%. And they are subject to change. Rates are expected to increase throughout 2022 and are now closer to 2018 levels than the historic lows seen during the height of the pandemic, per CNET. People hoping to purchase a new home or refinance an existing home are carefully watching interest rates to decide whether now is a good time to buy. Currently rates are still considered good, but they have been lower in the recent past. Main goals include securing a mortgage at a low interest rate, refinancing at a better rate, or working to shorten the length of the loan while avoiding fees and penalties. Your credit score can impact your loan and interest rate options, so it’s important to establish and maintain healthy credit.

Deciding which type of mortgage to get is an important factor. The most common loan term is the 30-year fixed mortgage rate which has smaller payments than the 15-year fixed. Though the term stretches out longer for the 30-year, it usually carries a higher rate than the 15-year. If you can afford it, the 15-year is generally optimal. Not only will you pay less interest, but you’ll ultimately pay the mortgage off faster. Though the amounts of principal and interest paid down each month varies, the total payment remains the same with fixed-rate mortgages. This protects borrowers from potential increases of the overall mortgage as the rate of interest remains stationary throughout the life of the loan. Fixed-rate loans are generally deemed safest as the amount due is predictable. Thus, they are greatly desirable to new home buyers and folks who are refinancing and who seek to make the same payment every month. Overall, when interest rates are high, it may become more difficult to qualify for a mortgage. Using a mortgage calculator can help folks visualize the impact of different rates on a monthly mortgage.

More complicated are ARMs. Those letters stand for adjustable-rate mortgages and there are different kinds. 5/1 ARM has a fixed rate of interest for the first 5 years of the loan and after that the rate adjusts annually over the remaining 25 years. 10/1 ARM remains at a fixed rate for the first 10 years of the loan and then adjusts annually over the remaining 20 years. 5/6 ARM has a fixed interest rate for the first 5 years of the loan and adjusts every 6 months over the remaining 25 years. 7/6 ARM has a fixed rate for the first 7 years and then adjusts once every 6 months over the remaining 23 years.  10/6 ARM loan has a fixed rate of interest for the first 10 years of the loan. Then, the interest rate will adjust once every 6 months over the remaining 20 years.  ARM loans frequently and initially provide a lower interest rate than a 30-year fixed – but shifts in the market can significantly increase interest rates so it may be riskier over the long-term.

There are factors which will influence what type of mortgage to go for such as how long you plan to live in your residence and how prepared you are to deal with unexpected changes. It’s also vital to understand penalties, structures fees, and other complexities that may exist. To find the right loan option, whether fixed or variable, it’s important to understand timing and what you can afford. It’s a solid idea to shop among lenders for the most favorable rate, lowest points, and other upfront fees. Carefully examine your choices, pay attention to interest rates, and maintain insight into the economy and your future expectations.

Currently, experts are expecting mortgage rates to rise in 2022. However, while that is likely accurate, that prediction is subject to change. People will want to lock in their interest rate while it is at its lowest point during their homebuying process or delay locking in if rates will go lower. It’s generally a good idea to lock in if rates are rising and are unlikely to fall to optimize savings. Rate locks are often helpful as they offer buyers a specific rate while the lender takes time to prepare documents. However, do note that some charges may apply. Buyers should understand the lender’s terms and get everything in writing. It’s important to understand what you are signing. Whether you can get out of a locked-in rate depends on terms. Once you close, the loan has the potential to be sold to another company who will then oversee collecting your monthly mortgage payments.

Refinancing a mortgage occurs when a homeowner is paying off an existing loan and replacing it with a new one. This is generally done to lower one’s balance and interest rate or to shorten loan terms. In some cases, people may seek to get cash from their home. The lender will use the newer mortgage to pay off the old one. This leaves the homeowner with one loan and one monthly mortgage payment. In the case of divorce, a refinance may take place to remove someone from the mortgage. Or it can occur to add someone. Those seeking refinancing must meet requirements to refinance and understand the terms. Often, an appraisal is required to determine the value of one’s home. Like getting a mortgage, it’s a good idea to shop around when considering refinance options. Always compare different lender’s rates and understand all the fees involved. Closing for a refinance is often quicker than closing for a home purchase and during the process loan documents will be signed. Generally, people refinancing should expect to pay 2 to 6% of the total value of the loan in fees and settlement charges.

Finding a decent mortgage loan encompasses securing the lowest rate possible. However, much more is required. Whether you’re buying your first home or refinancing, the process involves careful thought. This includes factors such as being aware of interest rates, shopping around for the best deals, understanding fees and associated charges, paying attention to the real estate market and more. Plus, you must ultimately vet and trust the lender to handle the process. Consider talking to your bank or finding a mortgage broker who works with many lenders. Loan originators are lenders who accept your application and handle the mortgage process up until closing. If you are uncertain of what to do, tap the brain of a trusted mortgage adviser/broker who is a dedicated mortgage specialist or an independent financial adviser who can provide advice when securing a mortgage or shopping around.

Buying a home or refinancing for better terms is a rewarding experience because owning real estate is ultimately a wonderful investment. Not only will you gain tax benefits, but homes generally appreciate over time. Money you pay for rent is generally tossed out the window, whereas, when you own a home, you gain stability and build equity ownership in your property. However, you’ll want to be wise when entering a mortgage so that you’ll secure an affordable loan while gaining optimal financial benefits.

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