The Building Process: Finance Your Home
Buying a home is one of the biggest financial purchases you will ever make. Truth be told -- many people find applying for mortgage intimidating or frustrating -- or both.
However, getting a mortgage has its advantages. Qualifying enables you to buy more house than you might afford with cash on hand. Mortgage interest costs are usually tax deductible.
Predicting the exact cost is a guess until all choices are finalized. Information planning and self-discipline are your best assurance of keeping costs under control. Begin by determining how much cash you have (liquidity) and how much you can borrow.
Your Assets
List available cash such as checking and savings accounts. Will additional cash accumulate during construction? Home buyers typically need cash for loan application fees, the down payment, closing fees and move-in expenses. Consider assets you can turn into cash, such as equity in your existing home. Other assets might include a cash gift from a family member, maturing bonds or the cash value of an insurance policy.
Amount You Can Borrow
Mortgages come in many shapes and sizes. Fixed-rate, adjustable, balloon and so on. Some areas even have special programs for first-time home buyers. Your goal is to match a loan program to your circumstances so you can by the home you want. Here is some basic terminology to help familiarize yourself:
Pre-qualifying -- Smart buyers today request an informal review of their financial positions to determine how much money they can borrow. Pre-qualifying can help establish your budget, identify financial details that might interfere with your plans (such as an error on your credit report), and help you compare loan programs. Pre-approval requires formal application and partial processing of your mortgage application.
The amount you can borrow is based on factors such as your assets, how much you owe, your income and the length and stability of your employment. If you fail to qualify for the amount you want, find out what changes might qualify you for a larger loan. Consider omitting some items now (a deck or finished basement ) and adding them later.
Loan Application -- Assemble the required financial documents and information prior to your application. Your lender can provide a list of needed items. Read any documents and ask questions before you sign them. You should receive a copy of each document you are asked to sign. Expect to pay for a credit report and an appraisal when you submit the application.
Down payment --The down payment is the difference between the price of the home and the amount of the loan you obtain. The deposit you give to the builder and items you pay for during construction may count toward the down payment. If you own the lot upon which your home will be built, its appraised value will be considered part of the down payment. Be certain you understand the builder’s contract regarding potential refund of your down payment.
Closing Costs -- Charges associated with the transfer of ownership make up your closing costs. They are often estimated at 2 to 3 percent of the loan amount.
Fixed-rate Mortgage -- With a fixed-rate, the interest rate stays the same through the term of the loan. The 30-year, fixed-rate mortgage is popular because of its stability. A 15-year, fixed-rate mortgage pays off the loan in the shorter time and accumulates equity faster because you make a higher monthly payment.
Adjustable Rate Mortgage -- A mortgage on which the interest rate can be changed. ARMs are easier to qualify for because their initial low interest rate results in a lower payment. The rate can be adjusted up (or down) over the term of the loan -- usually in 1-year increments. Rate caps limit how much the interest rate can change at one time and over the life of the loan.
Balloon Mortgage -- Some lenders offer loans that mature before the loan is fully amortized. For instance, a 7-23 loan comes due after 7 year, but it may have an option to renew for 23 additional years at a predetermined rate if the borrower meets certain requirements. |
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