In our last blog post, we took you through some of the earlier steps in preparing to buy your first home in Asheville, North Carolina. These steps were a little more abstract: thinking about design elements, creating a timeline to ownership, and working on savings and credit scores. With all of that taken care of, it’s time to take the first concrete steps towards homeownership: securing financing, creating a realistic budget, and finding a realtor.
Getting a Home Loan
For the vast majority of homebuyers—especially if it’s their first home—buying a house with one cash payment isn’t an option. That’s where mortgages come into play.
Mortgages are just like any other loan, except the property you’re buying is the collateral in the loan. You pledge the house you’re purchasing to the lending bank and are given a set amount of monthly payments that need to be paid back before you own the property free and clear. These payments will include the initial loan, plus interest. If the you default on your mortgage payment, the bank can foreclose on the property, evict you, and sell the house to recoup the difference on the mortgage debt.
There are many types of mortgages available, but most home loans are either fixed-rate or adjustable-rate mortgages.
A fixed-rate mortgage is the most straightforward option: you pay the same interest and principal payment for the entire duration of the loan—typically 15 or 30 years. A fixed-rate mortgage means even if interest rates go up, you are locked in at your rate. You do have the option of refinancing your mortgage should market rates fall below what your mortgage’s interest rate is, though.
Fixed-rate mortgages are ideal if you know your finances are stable, but can’t gamble on interest rates increasing. Since you know exactly what your mortgage payment will be each month, it’s much easier to factor a fixed-rate into planning a monthly budget.
Adjustable-Rate Mortgages (ARM)
An adjustable-rate mortgage is slightly more complicated. With an ARM, your interest payment is fixed for the initial term, but will fluctuate with the market interest rate. ARMs often come with an initial rate that is below market but can increase later on down the road. This means your ARM may be more affordable in the short term, but there’s the potential for it to become unaffordable somewhere down the line. Your monthly payment could decrease as well, depending on the interest rate at that given time.
Either way, an ARM is the less predictable mortgage available, and probably isn’t the choice if you plan your budget out in advance each month.
Getting Pre-Qualified and Pre-Approved
Mortgage pre-qualification and pre-approval are sometimes used interchangeably but are two entirely different things. They’re two steps in an important process when shopping for a mortgage.
Pre-qualification is typically free and can be done online or over the phone. You’ll supply the lender with an overview of your debt: your income, debt, and assets. This process doesn’t involve an in-depth investigation into your credit history or your ability to purchase a home and is based entirely on your self-reported information. Mortgage pre-qualification doesn’t give you an exact loan amount or mortgage rate and is only meant to give you an idea of about what you can expect to get approved for.
This is a great opportunity to discuss your lending options and see which mortgage structure will work best for you. Many brokers require a pre-qualification letter at minimum when you make an offer on property. However, since a pre-qualification rate is only a rough estimate, a pre-approval carries much more weight.
Mortgage pre-qualification is an essential step in understanding your own financial standing, but pre-approval gives the final word on exactly how much you can borrow. It’s a much more involved process—you must complete an official mortgage application and provide documentation that will allow the lender to do an extensive look into your financial history and credit score.
Once the lender has looked over your finances, they’ll pre-approve you for up to a set amount of money. You’ll also get a better idea of the interest rate that will be attached to your mortgage—a rate some lenders allow you to lock in during the pre-approval process.
Why Look at Mortgages Before Homes?
Imagine finding your dream home, only to have your mortgage loan come up just short. If you’re pre-approved before you start looking for homes, you’ll know the most you can offer on a house before you hit the streets to shop around. Knowing your cap will help you avoid getting your hopes up and will help your realtor zero in on a neighborhood and home that will work for you.
Looking for a Realtor
We saved an easy step for last on this blog post. Keller Williams Asheville has a massive team of brokers and realtors that can help you on your homebuying journey. You can look through our roster by clicking here. Our realtors all have their own specialty, whether it’s a particular neighborhood, green living, historic homes, or mountain getaways.
Find someone you like, give them a call, and let’s get you into the home of your dreams!
In our next post, we’ll give you an idea of what you can expect when you’re out on the road shopping for homes.
We Are Here To Help
Our agents receive extensive training and are equipped with the latest technology to help you find your next home. Most importantly, they love working with people just like you!