Tired of paying rent and ready to become a homeowner? Good news! According to Trulia’s recent rent versus buy report, buying a home still is a less expensive option than renting, thanks to relatively low interest mortgage rates and fast-rising rents. And, even better news, you’ve taken a step in the right direction when it comes to saving money—buying can be almost 40 percent cheaper than renting.
Before you start picking out curtains and furniture for that new home, however, some financing decisions need to be made. Determining the type of mortgage that is best for you and your family may seem intimidating, but there is one out there that’s right for you.
Here, Trulia offers some insight into how to find the right type of mortgage to fits your needs:
1. I want a low monthly payment. What type of mortgage should I look for?
The standard 20 percent down, 30-year fixed rate loan will help keep your payment low. For example, if you plunk down 20 percent (or $50,000) on a $250,000 property, your monthly payment would be $990. Other mortgage options, while possibly helping you build equity faster, could add more than $450 to your monthly payment on that home.
2. What if I can’t afford a conventional mortgage?
Let’s face it, not all of us have enough socked away in the bank for a 20 percent down payment. But there are mortgage options that require less cash up front and can help you become a homeowner. A 10 percent down payment loan with private mortgage insurance or a Federal Housing Administration (FHA) loan require less money from the buyer upfront. But it does mean you’ll have a higher loan balance and will be paying more money each month. It also means you’ll have less equity in the home when you’re ready to sell because you’ve also been paying mortgage insurance premiums. However, if you can handle the higher monthly payment, but just don’t have the money saved for a large down payment or conventional mortgage, these options could be right for you.
3. I have two toddlers and want to pay off my mortgage before they head to college. How can I do that?
A 15-year fixed-rate loan could help you reach that goal. With this type of mortgage, you’re paying off your loan principal faster and gaining equity in your home more quickly. On the flip side, you’ll have a much higher monthly payment. It’s a great way to gain equity if your budget can handle it. The trade-off is you’ll have less cash on hand for other expenses as they arise.
4. I’m downsizing to a smaller, less expensive home. Do I still need a mortgage?
One of the smartest things you can do is commit to a home that meets (and doesn’t exceed) your needs. You can avoid monthly payments and interest altogether by paying for your home outright. Bonus: You’re building equity as your home’s value increases over time.
5. I’m not sure how long I’ll live in my current city. Does it still make sense to buy?
How long you stay in a home is an important consideration when deciding to purchase a home and take out a mortgage. It might be five years before you recoup the initial costs of purchasing a home, so if you’re certain you won’t be staying put much longer than five years, options that get you the most equity in your home—such as a 15-year or 30-year mortgage—are good ways to go.