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Buyer Process: Page 3

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What Price Range Is Right For You?

How large a down payment should you make?

Many new home buyers put down 20% or more toward the purchase of their new home. But there are many other programs which allow for very small or even no down payments. However, a down payment of less than 20% may require you to purchase Private Mortgage Insurance (PMI) which, of course, adds to your closing costs and monthly payments.

Are there other costs involved?

In addition to the down payment and mortgage insurance, there will be other costs involved in purchasing your home. These secondary costs usually include closing costs. These are the expenses associated with the transfer of property ownership. As a rule of thumb, these costs can range from about 3% to 4% or more of the cost of the home depending on your lender and area of the country. They can include attorney fees, lender fees (or points), escrow fees and recording charges. Your agent can explain any of these costs in greater detail. Other upfront costs could include moving expenses, a building inspector to evaluate the home, and repairs done prior to moving day. Don’t hesitate to discuss any of these costs with your agent. The sooner you know how much you’ll need, the sooner you’ll be able to determine a more accurate down payment and purchase price.

How high should you go on your monthly payment?

The answer will depend on how much you require for other living expenses. One thing you certainly don’t want to do is to make yourself “house poor” so that you can’t afford the quality of life you have envisioned in your new home. You can begin to get an idea now of what your monthly mortgage payment might be by listing some of those expenses and estimating what you think you’ll be paying for them in future years. Living expenses include food, clothing, transportation, utilities, medical and dental care and installment payments—to name a few.

What you should pay for a monthly payment?

Starting with your down payment, you’ve begun to get an idea of what maximum amount you may want to pay for a house. Will your payments be affordable? A good rule of thumb is that your monthly housing expense including taxes and home insurance payments should not be more than approximately 1/3 of your gross monthly income.

The Adjustable Rate Mortgage

Many people, especially first time buyers see the adjustable rate mortgage as a way to get a larger home than they could with a fixed rate loan. Adjustable rate mortgage interest rates usually start out lower than a fixed rate loan. Points and fees added to the loan up front are usually lower and the likelihood of qualifying for a larger loan amount becomes an attractive alternative. This affords the buyer the opportunity to purchase more home for their dollar. Adjustable rate mortgages are based on any one of several indices used to set the interest rate. Movement of the index causes movement of the rate. Some indices are more volatile than others. One of the most stable indices is the Eleventh District Cost of Funds Index. Responsible lenders also build in lifetime rate caps and annual payment caps to their adjustable rate mortgage for your protection.