Buying a property often feels overwhelming. It's a significant investment that will likely take many years to pay off. Before looking at properties, most people elect to get pre-approved for a mortgage - this is the correct way to start your home search. The pre-approval process involves providing the lender with information about your financial situation. I ask for documentation while a client is trying to get pre-approved to make sure there aren't any errors in their application. The financial institution will then provide you with a pre-approval letter saying that if your finances are truthful and you don't accrue any more debt, then the bank would agree to finance your new home.

There are many choices to make with mortgages and finding the right one can become stressful. There are a few critical concepts that you need to keep in mind when applying for a mortgage.

Try to Have a 20% Down Payment, but if you don't - It's OK!

In the United States, if you have less than 20% down, you will pay private mortgage Insurance (PMI) in addition to your regular mortgage payment. PMI rates vary from 0.3% of the home's value per year to approximately 1.5%.

For example, if the PMI rate was 0.5% and you purchased a $300,000 house with 10% down, you would be paying $1,350 annually for this insurance. While it is tax deductible, the only purpose of this coverage is to protect the bank. You get no benefit from it. It's effectively wasted money.

Also, you must keep making the PMI payments until you reach 20% equity in the house. Once you have 20% equity, you can call the bank and ask them to cancel the insurance payments.

In the hypothetical mortgage, assuming it was a 30-year fixed at 4%, you would not be able to stop these payments until approximately six years into the loan. That's an additional $8,100 in expenses on your $300,000 home!

If you have less than 20% down, consider a low downpayment Conventional or FHA mortgage. Each client is different so it's important to discuss what options fit your financial picture best.

Paying Points

Points are one of the least understood concepts of mortgages. You may read advertisements for mortgages that showcase a rate of 4% APR with 2 points. The meaning of this is relatively straightforward. You will get a rate of 4% by paying 2% of the loan's value up front. If each point is worth a 0.25% rate reduction, the equivalent zero-point loan would be at 4.5% (For Example).

Suppose you were to take a $100,000 30-year mortgage using the rates above as an example. Without the points, you would pay $82,407 in interest over the life of the loan. With the points, you would pay $71,870 in interest in exchange for an extra $2,000 up-front at closing time. That's an incredible $10,537 in interest savings for just $2,000.

Superficially it seems like a great deal to save some interest. The catch is to consider how long you will remain in the home. If you are buying a home that you envision living in for the next 30 years and you can afford to buy the points, it's usually recommended to do so. If you are purchasing a home that you intend to sell in two or three years, then it's not worth it. That $2,000 you added at closing is money you won't get back at selling time if you've only had the property for a couple of years. I discuss these options once you're ready to move forward with your home loan.

Variable Rates Versus Fixed Rates

In general, fixed-rate mortgages are the best offering for most people. Some articles suggest that you would want a variable rate to save money on interest if you're planning on living in the home for a short period or if you are betting that interest rates will go down.

The reality is that buying a home is unpredictable at times. Many people have purchased homes thinking they would move in a few years but then elected to live in the house forever. A fixed-rate mortgage gives you security and allows you to budget. Your payment doesn't increase for the duration of the loan. It doesn't matter if you lose your job or your home goes down in value, the amount you pay, and terms will remain the same.

However, with a variable-rate loan, there's little certainty as to what will happen at the loan's end. Maybe your home will have gone down in value, and you'll be underwater. Maybe interest rates will have gone up, and now your monthly payment is high. Adjustable rate mortgages do have value, they're just not for everyone. It's important to weigh the pros and cons of each style loan before making your decision.

In conclusion, the most valuable asset during your home search is your team. The transparancy, experience and communication from your lender, realtor and attorney must fit your needs/wants. Make sure you choose a team that is more concerned about your financial success than their commission - this is the winning formula.

Don't hesistate to reach out with any questions.

All the best - Fernando