5 things to consider when buying or refinancing a home

The mortgage market can be tricky, especially for first-time homebuyers. Borrowers often find themselves overwhelmed with mortgage terms, down payments and risky investments. It can be challenging to know what pitfalls to avoid before refinancing.

Read on to learn more about some of the most important things to consider before buying or refinancing a home.

1. The 20% down payment rule

Many borrowers buy a home before they’re financially ready, locking them into an agreement that they can’t afford. It’s more of a guideline, but putting down 20% of the value of their home when they take out a mortgage can help give them an advantage.

Many lenders no longer require 20% down payments. Some even readily issue loans at no money down. But there’s still good reason to stick to the 20% rule. The more equity a borrower can purchase upfront, the lower their monthly rates will be and the quicker they can pay back the loan.

It’s important to remember that some lenders still consider a down payment of less than 20% a risky investment. Lenders may charge additional fees, such as private mortgage insurance, to mitigate the risk to themselves. (More on that later.)

2. Different term lengths

The two most common mortgage terms used to buy a home are 15 years and 30 years. Each has its advantages and disadvantages to consider before buying a home.

Some homeowners will opt for a 30-year mortgage to reduce their monthly payments, but their interest rates tend to be higher. These homeowners make payments over a longer period, so they end up paying more than those who opt for a 15-year mortgage.

The 30-year agreements do have their upsides. Lower monthly payments mean borrowers can invest in a bigger, more expensive property than they could with a 15-year agreement. It also gives them more cash to put into their savings or make other purchases.

3. Cost of refinancing

Refinancing a home might make sense for borrowers whose financial situation has changed. They might want to refinance to lower their monthly rates or shorten the term of the agreement.

But refinancing isn’t the right move for everyone. Depending on the initial mortgage terms, savings could be minimal. They might be too small to justify the time it takes to refinance.

It’s also important to know there can be several additional fees associated with refinancing. Although the amount in fees paid varies depending on the bank and where a homeowner lives, the average cost of refinancing is around $5,000, according to Freddie Mac.

4. Private mortgage insurance

Private mortgage insurance (PMI) protects mortgage lenders from risky borrowers looking to buy a home. Whether an owner is buying or refinancing a home, they could be required to pay PMI before taking out a mortgage (or refinancing).

Most lenders will require PMI if borrowers are refinancing and the equity they already control is still less than 20%. If they’re buying a new home and make a down payment of less than 20% of the home’s value, they might also be required to pay PMI.

Borrowers can pay PMI in a variety of ways. The most common form of payment is through monthly premiums tacked onto their mortgage payments. They also might have the option to make a one-time, up-front payment, depending on the lender.

5. Credit score matters

According to Quicken Loans, most lenders will disperse a conventional loan to borrowers with a credit score as low as 620, which is considered below average on the FICO rating scale. The Federal Housing Administration will often issue loans to borrowers with even lower credit scores.

Even if a borrower qualifies for a loan, their credit score will help determine the terms of their agreement. A borrower with a low credit score might be considered a risk for mortgage lenders, meaning they could be required to make a minimum down payment. It could also cause the interest rate on the loan to go up.

If their credit score is on the lower end, they might consider taking some time to give it a boost before reentering the housing market.

Ameritas is here for you

Buying or refinancing a home is an exciting life event. It’s important to understand your options to ensure you’re making a move that makes sense for you.

Ameritas is in the business of fulfilling life. Bringing you valuable information to help you plan well and enjoy life is part of what we do. To learn more about Ameritas, visit ameritas.com/about.