Financing Your Home
Unless you have enough cash to buy a home outright, you will need a mortgage loan to finance your home purchase. There are plenty of loan options out there, but the best one depends on your financial situation. To help you make the best decision when applying for a mortgage and buying your next home, we’ve provided these helpful FAQs and resources to help you learn more about financing your home in the Triangle.
What Types of Mortgages are Available?
Although there are seemingly thousands of mortgage products, there are only four basic types of loans used by the majority of home buyers.
Conventional Loans
This is the standard mortgage used by buyers who have good to excellent credit and make down payments of at least 10%. If you need to make a lower down payment, there are programs available based on buyer credit and location.
FHA Loans
The Federal Housing Administration (FHA) offers government-insured loans with low down payment requirements and more flexible guidelines. These qualities make FHA loans easier for first-time buyers to obtain. However, FHA mortgages do require mortgage insurance premiums, which can result in higher overall costs.
VA Loans
The US Department of Veteran’s Affairs (VA) also offers government-insured loans. All veterans and active military members qualify for VA loans. These mortgages offer up to 100% financing, simplified loan approvals, and lower interest rates, so they can cost less than conventional loans.
USDA Loans
The US Department of Agriculture (USDA) offers up to 100% financing and below-market interest rates for buyers who are searching in rural or low-density areas. Because of the government’s loose definition of the term “rural,” several areas around Raleigh (including Clayton, Knightdale, Rolesville, and Wake Forest) can qualify for this loan.
Will My Interest Rate Change?
This depends on which type of mortgage you choose. If you choose a fixed-rate mortgage, your payments will stay the same. If you choose an adjustable-rate mortgage, then your payments will increase. There are pros and cons to both:
Fixed-Rate Mortgages
This loan is a good option for people who want the stability of a payment that won’t change. With a fixed-rate mortgage, your principal and interest payments remain the same for the duration of the loan, although property taxes and insurance costs may increase. Examples include a 30-year fixed mortgage and a 15-year fixed mortgage.
Adjustable-Rate Mortgages (ARMs)
ARMs generally offer lower initial interest rates than comparable fixed-rate mortgages, which can increase your purchasing power. ARMs can make sense if you plan to move to another home or refinance in the relatively near future. This allows you to take advantage of the lower initial rates and payments at the early part of the loan before you see any significant increases. Examples include a 7/1 ARM (where you pay a fixed interest rate for the first 7 years and the rate adjusts every 1 year) and a 3/3 ARM (where you pay a fixed interest rate for the first 3 years and the rate adjusts every 3 years).
The good news is that interest rates continue to hover near record lows. No matter which of these mortgage options you choose, it’s best to lock in the low rates now rather than wait to see if they will decrease.
What Do Mortgages Include?
The four components of your monthly mortgage payments are principal, interest, taxes, and insurance, which are often abbreviated to “PITI.” Let’s break these components down a little further.
Principal
This is the initial amount that you borrowed from your lender, which may be the price of your home (if you received 100% financing) or a little bit less (if you put money down). As you pay off the principal, you build equity.
Interest
This is what you pay the lender for the privilege of borrowing money. Initially, you will pay more in interest than principal, but over time you will start to pay off more of your principal and build more equity in your home.
Taxes
Your annual city and county taxes assessed on your property are divided by the number of mortgage payments you make in a year and added to your mortgage.
Insurance
Your monthly homeowner’s insurance payment covers you against various hazards and is added to your mortgage payment.
How Do I Choose the Best Mortgage?
You’ll need to take a look at your finances to determine how much you want to pay per month for a mortgage. After that, it will be easier to narrow your options. Your biggest decisions will be based on what type of mortgage you want and how much money you want to put down. Ask yourself these questions to help you determine which loan is best for you.
- How much have you saved for a down payment? If you don’t have the conventional 20% saved up yet, you may want to consider loans that offer low to no down payment requirements.
- Do you plan to move in a few years? An ARM, for instance, can provide you with initially low-interest rates and payments until you sell your home.
- Do you have other debts? A good rule of thumb is to cap your total monthly loan payments at 36% of your take-home income, with no more than 28% going toward your mortgage payments. (It is possible to purchase a home with student loans or other debts.)
Where Can I Find a Lender?
As you’re reviewing your budget, paying off any other loans you have, and determining how much you feel comfortable paying per month, talk to a local lender about your options. If you need a recommendation for a lender, check our Business Directory or call us at 919.612.9885. We would be happy to talk with you.
Where Can I Find More Information?
We’re here to be a resource as you consider buying a home in the Triangle and reviewing your financing options. We would be more than happy to meet with you and discuss your plans. Call us at 919.612.9885 or check out the resources below.