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Homeownership is one of the things baked into the American Dream. Even among the increasingly powerful Millennial generation, nearly 90% want their own homes.
Of course, the journey from an aspiring homeowner to an actual homeowner includes a stop at a bank for most people. The average going rate of around $226,000 per home makes paying for one out of pocket simply unrealistic for most people.
That doesn’t mean you should rush into a mortgage. Here are five questions to ask mortgage lenders before you take the loan.
1. How Much House Can I Realistically Afford?
Just because you can qualify for a mortgage at a certain size, it doesn’t mean you should take it. Your local housing market can vary a lot from the national average. That means you need a loan right-sized for your market and your ability to pay.
Talk with your mortgage lenders about your existing debt and your income. Then see what they recommend in terms of how much house you can afford.
2. What Type of Loan is Right?
There isn’t just one kind of home loan. You may qualify for several types of loans, including:
- Conventional, fixed-rate mortgages
- Adjustable-rate mortgages
- FHA loans
- VA loans
Conventional, fixed-rate mortgages are the most common because they ensure a stable, lower payment. Adjustable-rate mortgages remain less popular since the payments change over time. FHA and VA loans prove less common since they focus on rural development and veterans or active duty service members.
3. What Should I Save for a Down Payment?
Down payments often leave people scratching their heads. FHA and VA loans often require extremely low down payments. Even fixed-rate and variable-rate mortgages are available with low down payments.
The catch is that low down payments often mean that you must get private mortgage insurance. That can drive up your payments which makes affording a home more difficult.
When in doubt, aim for 20%. That’s the down payment that frees you from private mortgage insurance.
4. What’s the Interest Rate?
The interest rate is the base percentage charged on your loan. While that number can prove flexible, asking around should give you a picture of what you can expect overall.
Factors like your income, debt, and credit score will all influence your interest rate.
5. What’s the APR?
The APR or annual percentage rate is the interest rate the lender will charge after they add in all the fees. The higher the APR, the more fees a lender tacks on to offering you a mortgage.
Benefitting from the Questions You Ask Mortgage Lenders
If you plan to ask mortgage lenders questions, you should benefit from the process.
Lenders should, as a rule, steer you toward a mortgage or home that you can afford. They should also recommend loans that reflect your local housing market.
Watch out for drastic differences between the base interest rate and the APR. If the APR comes out way higher than the base rate, you should look elsewhere.
Looking for more tips on your finances? Check out our personal finance articles.