Home Ownership & Mortgages
Buying or renting a home is a big financial decision. And whether it’s a condo, a townhouse, or a single family residence — new construction or a home with a history — this transaction will have a significant impact on your budget.
What do you need to know?
Understand the financial differences between renting and home ownership.
While owning a home may be beneficial for some, many people find renting to be a better option. There are plenty of examples that show how renting can save consumers a considerable amount of money. However, the decision to rent versus buying a home is purely a personal choice. Use this calculator to help determine which makes sense for you at this time. Also, read NCUA’s Renting vs. Buying a Home for more detailed information.
Know what you can afford.
Review your monthly spending plan to estimate what you can afford to pay for a home, including the mortgage, property taxes, insurance, and monthly maintenance and utilities. Make sure you save for emergencies. Plan ahead to be sure you will be able to afford your monthly payments for several years. Check your credit report to make sure that the information in it is accurate. A higher credit score may help you get a lower interest rate on your mortgage.
Shopping takes time and energy, but not shopping around can cost you thousands of dollars. To find the best loan, you have to shop around.
Understand loan prices and fees.
Many consumers accept the first loan offered and don't realize that they may be able to get a better loan. On any given day, lenders and brokers may offer different interest rates and fees to different consumers for the same loan, even when those consumers have the same loan qualifications. Keep in mind that lenders and brokers also consider the profit they receive if you agree to the terms of a loan with higher fees, higher points, or a higher interest rate. Shopping around is your best way to avoid more expensive loans.
Ask about down payments and private mortgage insurance.
Some lenders require 20 percent of the home’s purchase price as a down payment. However, many lenders now offer loans that require less than 20 percent down — sometimes as little as 5 percent on conventional loans. If your down payment is less than 20 percent, lenders usually require the homebuyer to purchase private mortgage insurance (PMI) to protect the lender in case the homebuyer fails to pay.
When government-assisted programs like FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services are available, the down payment requirements may be substantially smaller.
- Ask about the lender’s requirements for a down payment, including what you need to do to verify that funds for your down payment are available.
- Ask your lender about special programs it may offer.
If PMI is required for your loan
- Ask what the total cost of the insurance will be.
- Ask how much your monthly payment will be when the PMI premium is included.
Know the risks and benefits of loan options.
When buying a home, remember to shop around, to compare costs and terms, and to negotiate for the best deal. Mortgages have many features, including:
- fixed interest rates or adjustable interest rates;
- payment adjustments;
- some you pay only the interest on the loan for a while and then you pay down the principal (the loan amount);
- some charge you a penalty for paying the loan off early; and
- some have a large payment due at the end of the loan (a balloon payment).
Note: Federal credit unions are prohibited from charging prepayment penalties.
Consider all mortgage features, the APR (annual percentage rate), and the settlement costs. Ask your lender to calculate how much your monthly payments could be a year from now, and 5 or 10 years from now.
This mortgage shopping worksheet may also help you. Take it with you when you speak to each lender or broker and write down the information you obtain. Don’t be afraid to make lenders and brokers compete with each other for your business by letting them know that you are shopping for the best deal. Most lenders should provide initial amortization schedules for the life of the loan based on the features of the loan product.
Once you are ready to buy a home, consult your credit union about competitive interest rates and to find out about your mortgage options, including the term of the loan and the conditions.
Read the fine print. Disclosure statements are legal documents.
A disclosure details all material facts relevant to a transaction. Federal or state laws require financial institutions to provide disclosures containing information about terms to their customers. Reading disclosures can seem like deciphering a bunch of mumbo jumbo. But, disclosure statements contain the critical information you need to make an informed decision about which financial institution, and its products and services, to choose.
To understand your legal rights and responsibilities as well as the rights and responsibilities of the credit union, read the documents you receive from the financial institution. Read the entire disclosure document. Don’t be shy about asking for explanations, clarifications, and answers to your questions before you open an account or take out a loan.
You should understand the disclosure statements prior to signing any documents.
Get advice from trusted sources.
Buying a home is the largest investment most Americans will make. A mortgage loan is also one of the most complex, most expensive financial commitments you may ever assume, and it's okay to ask for help. Talk with a trusted housing counselor or a real estate attorney that you hire to review your documents before you sign them. You can find a list of counseling resources at NeighborWorks and on the U.S. Department of Housing and Urban Development's (HUD) website or by calling (800) 569-4287.
Know the different types of mortgage products.
Fixed rate and adjustable rate mortgages are the two main types of mortgages, but there is a wide variety of other mortgage products available. Below are pros and cons of just a few of the mortgage products you may want to consider.
COMMON TYPES OF HOME MORTGAGES
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|Type of Mortgague
||No surprises. The interest rate stays the same over the entire term, usually 15, 20 or 30 years.
||If interest rates fall, you could be stuck paying a higher rate.
|Adjustable-rate (ARM) or variable-rate mortgage
||Usually offers a lower initial rate of interest than fixed-rate loans.
||After an initial period, rates fluctuate over the life of the loan When interest rates rise, generally so do your loan payments.
|FHA (Federal Housing Administration) loan
||Allows buyers who may not otherwise qualify for a home loan because of less-than-perfect credit to obtain one with a low down payment.
||The size of your loan may be limited.
||Guaranteed loans for eligible veterans, active duty personnel and surviving spouses Offers competitive rates, low or no down payments.
||The size of your loan may be limited.
||Usually a fixed rate loan with relatively low payments for a fixed period.
||After an initial period, the entire balance of the loan is due immediately This type of loan may be risky for some borrowers.
||Borrower pays only the interest on the loan, in monthly payments, for a fixed term.
||After an initial period, the balance of the loan is due. This could mean much higher payments, paying a lump sum or refinancing.
||Allows seniors (62 or older) to convert equity in their homes to cash; you don't have to pay back the loan and interest as long as you live in the house.
||Subject to aggressive lending practices and false advertising promises, particularly by lenders that prey on seniors. Check to make sure the loan is federally insured.
Fair Lending Is Required by Law
The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant’s income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.
The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin. Under these laws, a consumer may not be refused a loan based on these characteristics nor be charged more for a loan or offered less-favorable terms based on such characteristics.
TIP: Know how your ARM adjusts.
Before taking out an adjustable rate mortgage, find out:
- How high your interest rate and monthly payments can go with each adjustment.
- How frequently your interest rate will adjust.
- How soon your payment could go up.
- If there is a cap on how high your interest rate could go.
- If there is a limit on how low your interest rate could go.
- If you will still be able to afford the loan if the rate and payment go up to the maximums allowed under the loan contract.