Once you've roughly determined how much you should spend, you'll want to get preapproved with a mortgage lender and confirm your true purchasing power. The most common type of mortgage is a fixed-rate mortgage. The interest rate and monthly payment amount remain the same throughout the loan period. Regular fixed-rate mortgages terms are usually for 15, 20, 25 or 30 years. The shorter the term, the lower the interest rate and interest charges over the life of the loan. However, even though you are saving over the life of the loan, a shorter term means a higher monthly payment.
You may also have heard of Adjustable-Rate Mortgages (ARMs). Adjustable-rate mortgages are 15- or 30-year loans with monthly payments that change over the term of the loan due to increases or decreases in the interest rate. You may have a special circumstance where an ARM makes the most sense for you. The primary advantage of an ARM is a low initial interest rate. Regular ARM adjustments are made at prenegotiated periods of time (six months, one, three or five years). Most ARMs have rate caps to protect you. These may be in the form of limits per adjustment or a lifetime limit for the loan.
Different lenders will offer various types of fixed-rate mortgage loans. When evaluating lenders, you'll want to compare the programs offered to see which would be most beneficial to you. You'll also see which lender can provide you the best rate and lowest fees. Overall, you also want to evaluate how easy the lender is to work with. You'll be relying on the lender to keep you well-informed and complete the loan package in time for your settlement date.
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Your closing costs will typically add up to anywhere from three to10 percent of the value of your total mortgage loan. The seller may pay some of these fees; others you will be responsible for. Your lender may also finance some, or even all, of your closing costs. Closing costs can be divided into three categories: lender fees, prepaid expenses and settlement costs. Here are some of the most common:
As a nonprofit institution, your credit union will keep these fees to a minimum.
Typically, two months of payments on each of these long-term expenses will be held "in escrow.” This means a third party will hold the funds until they need to be disbursed.
Not all of these costs will apply to your situation, and there may be additional fees that were not mentioned. When you apply for your mortgage loan, your mortgage officer will give you a "good faith estimate of settlement costs.” This document will outline all of the applicable closing costs and the dollar amounts of each.
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