Three Steps To A Happy Homebuying Decision
By James P. Graf
Fall 2007
A generation ago, aspiring homeowners faced limited choices among mortgage loans. There were a few adjustable-rate mortgages (ARMs) to go with conventional fixed-rate loan products, and a no-down-payment loan was available through the Veterans Administration.
Today, homebuyers can confront literally hundreds of different ARMs with variations that even mortgage professionals have trouble explaining. These variations can provide a loan that will suit you just fine, but determining which one works best for you can prove difficult.
So what do you do as a first-time homebuyer? What do you do if you have an adjustable rate mortgage that has “adjusted” up to a payment you can no longer afford and you want to refinance? How do you make the right decision?
First, determine your objective. If you are a first-time homebuyer and you want to live in a small townhouse or condominium for two, three or four years, you may find it best to consider a three- or five-year ARM. A fixed-rate mortgage usually is recommended if you intend to stay in the home for a longer period.
If you can no longer afford your home payments, consider refinancing into a longer-term mortgage at a lower rate. In many cases, even if your credit is imperfect, you may find opportunities to refinance into an FHA 30-year fixed-rate mortgage at an attractive interest rate. But you must not sit there and ignore the issue until your loan is 30, 60 or 90 days past due. The longer you wait in that scenario, the fewer your options.
Second, consider the costs of home ownership and make an honest assessment of what you can afford each month. Your mortgage payment does not include only principal repayment and interest – you also must consider real estate taxes, homeowner’s insurance and perhaps other fees. You’ll need to maintain the property – something will always need fixing! You may need to pay additional assessments and homeowner’s association fees.
Buying a home is one of the best financial decisions you can make – if it is carefully planned and properly implemented. Your decision must come from education, not emotions. One of the most unfortunate decisions some first-time homebuyers make is to forego everything else in their lives to own a home. No trips to the movies, no dinners out, no second car, no steaks on the grill. A new dress? Forget it! New shoes? Not a chance! Of course, this strategy can lead to severe problems in a marriage, and money problems are a leading cause of divorce.
Third, deal with a mortgage professional you can trust – someone who will take the time to educate you in the difficult process of buying a home and help you select not only the right dollar amount for your mortgage but also the right type and term for your mortgage.
Unfortunately, the mortgage business suffers from heavy turnover among its personnel, and many mortgage companies provide poor training. It is unwise to entrust your home purchase – perhaps the largest financial transaction of your life -- to your best buddy’s cousin who just got the job. Find an experienced professional. Do you know someone who has recently bought a home? Ask them about it. Talk to as many people – knowledgeable people – as you can.
Everyone wants to improve his or her lifestyle, happiness and financial position. That’s why you want to own a home! But first, you must strive to become an educated consumer.
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James P. Graf is Vice President and Managing Director of Affinity Relationships at First Guaranty Mortgage Corp., a provider of conventional, FHA, VA and other home loans. He may be reached at jpgraf@fgmc.com.
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Fixed-Rate or Adjustable-Rate Mortgage: Which Is Better?
A fixed-rate mortgage might be best if:
- You plan to live in your home for many years.
- You believe your income will remain steady for many years.
An adjustable-rate mortgage might be best if:
- You plan to stay in your home only a few years.
- You have good reason to believe your income will rise significantly.
- You intend to refinance at a lower fixed rate once you reach the ARM’s interest cap.