How much house you can afford is based on three factors: home prices, interest rates and your income.
So before you start shopping, it's really important to figure out your budget and what you can comfortably afford. Check out Freddie Mac's calculator that helps you get a handle on how much you can borrow. Also, remember that pre–approval letter we previously talked about? That'll be useful in helping you understand what you can afford.
One important factor in your budget calculations is the length of your loan. Do you want to pay back the money that you borrow over 15 years or 30 years? In general, the longer your loan term, the smaller your monthly payments.
Another important factor to consider is the type of mortgage loan you want. The interest rate on fixed–rate mortgages will stay the same through the life of your loan as will your monthly payment. A fixed–rate loan tends to have a higher interest rate because the lender isn't protected against a rise in its costs.
The interest rate on an adjustable–rate mortgage (ARM) may re–set every one, three or five years based on the movement of a specific index. Homebuyers may have low interest rates when they first take out their mortgage loans, but the rates may increase over the loan term. If your rate changes at a reset, then your monthly payment will change too.
A homebuyer who expects interest rates to increase or welcomes the stability of their monthly payments for the life of the loan should probably choose a fixed–rate mortgage, while a buyer who thinks interest rates will stay the same or decrease may consider an ARM.
The interesting thing about homebuying though is that it isn't a one–size–fits–all process. It's about whatever works for YOU. After all, it's your budget and these are your housing needs. Doing your homework to figure out what those needs are is the critical part — and we're happy to help!
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