Tired of paying rent and ready to
become a homeowner? Good news! According to our recent Rent vs Buy report, mortgage payments remain a
cheaper option than renting, thanks to low interest rates and fast-rising
rents. And, even better news, you’ve taken a step in the right direction when
it comes to saving money.
As part of the quarterly report, Trulia Chief Economist Jed
Kolko crunched the numbers, finding that buying can be nearly 40%
cheaper than renting. But before you start picking out curtains and furniture
for that new home, there are some financing decisions that need to be made.
Determining what type of mortgage is best for you and your
family may seem intimidating, but there is one out there that’s right for you.
We’ve outlined some common scenarios
that buyers encounter, and offer a few helpful suggestions to help demystify
the different types of mortgages.
I want a low monthly payment. What
type of mortgage should I look for?
The standard 20% down, 30-year fixed
rate loan will help keep your payment low. For example, if you plunk down 20% — or
$50,000 — on a $250,000 property, your monthly payment would be $990. Other
mortgage options, while possibly helping you build equity faster, could add
more than $450 to your monthly payment on that home.
I don’t have enough money for a 20%
down payment. Am I stuck renting forever?
Let’s face it — not all of us have a
20% down payment socked away in the bank. But there are mortgage options that
require less cash upfront and can help you become a homeowner.
A 10% down payment loan with private
mortgage insurance or a Federal Housing Administration (FHA) loan require less
money from the buyer upfront. But it does mean you’ll have a higher loan
balance and will be forking over more money each month. It also means you’ll
have less equity in the home when you’re ready to sell because you’ve also been
paying mortgage insurance premiums.
However, if you can handle the higher
monthly payment, but just don’t have the money saved for a large down payment,
these options could be right for you.
I’ve got two toddlers and want to pay
off my mortgage before they head to college. How can I do that?
A 15-year fixed-rate loan could help
you reach that goal. With this type of mortgage you’re paying off your loan
principal faster and gaining equity in your home more quickly. On the flip
side, you’ll have a much higher monthly payment.
It’s a great way to gain equity. That
is, if your budget can handle it. The trade-off is you’ll have less cash on
hand for other expenses as they come up. (And with small children, unexpected
expenditures are almost a guarantee.)
I’m downsizing to a smaller, less
expensive home. Do I still need a mortgage?
Good for you! One of the smartest
things you can do is commit to a home that meets (and doesn’t exceed) your
needs. You can avoid monthly payments and interest altogether by paying for
your home outright. Bonus: you’re building equity as your home’s value
increases over time.
I’m not sure how long I’ll live in my
current city. Does it still make sense to buy?
How long you stay in a home is an
important consideration when deciding to purchase a home and take out a
mortgage. As we’ve outlined before, it might be five years before
you recoup the initial costs of purchasing a home.
If you’re certain you won’t be
staying put much longer than five years, options that get you the most equity
in your home — such as a 15-year or 30-year mortgage — are good ways to go.
What else should I be thinking about
when considering buying a home and taking out a mortgage?
Most real estate professionals
recommend shopping around, obtaining information from several lenders to ensure
you’re getting the best price. You can also work with a mortgage broker to find
a lender. Securing a loan can take anywhere from a few
weeks to a few months, so it pays to do your homework.
Curious where you fit in the mix?
Check out our interactive Rent vs. Buy map and find out
whether it makes sense to rent or buy a home where you live.
October 16th, 2014
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