Financing a Home - a Foolproof Preparation Process

by : Elena Laramie

Buying a home is probably the single largest investment most people will make in a lifetime. By preparing yourself and your finances for a home purchase, you can ensure a smooth home-buying process.

Start by checking your credit

To have an opportunity to get the best possible mortgage, make sure your credit history is clean and accurate. Start checking your credit profile at least a few months before the house hunt.

Make sure the information is correct and dispute any problems you discover.

For an understanding of your credit history, check your credit profile.

Figure out how much home you can afford

The rule of thumb is that you can afford a residence that runs about two-and-one-half times your annual salary. Most banks insist on the following:

Your monthly housing costs (including mortgage principal and interest, property taxes, homeowner's insurance and private mortgage insurance) should equal no more than 28 percent of your gross monthly income.

That sum (plus your minimum monthly payment on any long-term debts) should equal no more than 36 percent of your gross income.

Understand the Elements of Home Financing

Down Payment - This is the up-front money you pay toward the home. The more money that you can allocate to the down payment, the lower your mortgage will be (saving you in interest over the life of the loan).

Types of Mortgages - The principle amount and the interest will determine your monthly payment schedule. The typical mortgage is for 13-30 years and falls into two categories:

a. Fixed Rate A fixed rate mortgage consists of a set monthly payment that remains constant throughout the life of the loan. The interest tends to be a bit higher on fixed rate loans.

b. Variable Rate Mortgages (VRM) Variable Rate Mortgages give you a lower initial interest rate with the risk of it rising in years to come - The advantage being the chance that the interest rate could decrease. A cap of around 5%-6% above the initial rate protects you from extreme jumps in interest rates.

Closing Costs - These are the costs of borrowing money, establishing the loan, and preparing all of the documentation for the sale. This cost can be significant, so make sure and plan for them. Buying a home can be one of the best investments you can make. With each monthly payment, you are building equity in your home.

Enjoy the powerful benefits that pride of ownership brings. Your home will give you and your family a wonderful feeling of stability as you become a part of your new neighborhood.