What is the smart way to
buy a home?
Q With all the mortgage news,
we're confused. What is the smart
way to buy and finance a home?
AThere has been a lot of talk
about adjustable rate mortgages,
subprime loans, and the like and you
might be wondering if it is actually
hazardous to buy a home! But
nothing can be further from the
truth. Remember that more than 97
percent of homeowners pay their
mortgages on time. Buying a home
is the great route to financial
security.
The rules of smart home buying
haven't changed. Simply put: Buy a
home you can comfortably afford
right now.
The first step is to get a loan
with a good interest rate. To do
that pay your bills on time to create
a good credit rating. Next, save
some money so you can make a
down payment on your new home.
The down payment combined with
a good credit rating will give you an
affordable interest rate and start you
off with a little equity in your new
home. Equity is the best insurance
you can have against unforeseen
events.
If you want to buy a home in
the next two years, don't get
yourself in a lot of debt with things
like big new car loans.
possible thing. If you are buying what you believe to be your permanent home, a fixed-rate
mortgage is best. The 15-year instruments carry lower interest rates than 30-year mortgages.
You can still buy a home if your credit isn't perfect or if you have new car payments or
if you don't have a big down payment, but lenders will be tightening their rules and you will
have a higher interest rate. Still, if you finance a house that you can comfortably afford right
now, you will be making a wise move.
Interest rates also can be reduced by paying points (one point equals 1 percent of the
principal). A new study by Penn State College of Business and economists at Freddie Mac,
however, show that fewer than 1.5 percent of borrowers held loans long enough to make
that decision pay off.
Many lenders offer better rates on loans that charge penalties if the loan is refinanced or
paid off ahead of schedule. It's standard practice for lenders to charge six months' interest
on 80 percent of an outstanding balance if the loan is refinanced or paid off within one to
five years.
Advisers reporting in Business Week say the possibility of paying the penalty offsets any
advantage of the lower interest rate.
