The selling price is only the beginning.  How you finance your investment will translate into your monthly payments which is what matters the most!

Start with an open mind and learn as much as you can (or care to) about the different mortgage products available to you. It can seem daunting because most attempts at researching mortgages invite an avalanche of phone solicitations and emails. Yet, this is one of the most important part of buying a home. How can you decide which house you can afford without first deciding how you will be financing it?

Though I'm not a mortgage broker, I work very closely with lenders because I consider this aspect of the real estate transaction a key component in fulfilling the homeowner's dream. Many nightmares of homeownership is linked to poor financing choices and/or misinformation. There are many websites offering good information but only local lenders can provide you local service.

Your credit score will determine what mortgage products are available to you. The higher your FICO (Fair Isaac & Company) score, the better deals you'll get. So, work on improving your FICO. The most significant improvements can take 1-3 years or more. However, some improvements can often be made in a matter of weeks. These smaller improvements may be significant and should not be overlooked. Search the internet for "credit score" or "FICO" for more details and get your FICO score while you're at it. Self inquiries do not count against you, but other people checking your credit too often can lower your FICO. Quick improvements include paying down your balances, closing down some (newer) accounts if you have more than 3-5, using a reputable credit repair service, negotiate increases to your credit limits with your major accounts. (The ratio between your balance and credit limit can effect your FICO, however, too much available credit can make you a higher risk as well.)

ARM (Adjustable Mortgage Rate) can get you lower monthly payments for a while. How long that "a while" is depends on the specific conditions of the package. Make sure you understand the terms thoroughly and have confidence that the terms fit your plan of action. This type of mortgage have soured many dreams but can be advantageous when applied correctly. Typically, there are 3 features in this type of mortgage: the start rate, the fixed period of the actual rate, and the increments of the rate increases after the first fixed period. The start rate is used to calculate your minimum monthly payment--obviously, the lower the rate, the lower the payment. The actual rate is what you are really being charged and will increase after the specified year(s). (Generally, the shorter the fixed period is, the lower the rate. You should choose the fixed period and rate option that is the best compromise for you.)
If your monthly payment is less than the actual monthly interest your lender charges, you have a negative amortization, which means you owe the bank more each month. This is why many people find themselves in trouble when their property value does not appreciate enough to keep up with their rising debt on the house. After the initial fixed rate period, the interest rate will increase every 6 months (typically). The new rate is usually tied to a particular index such as LIBOR, COFI, or similar index the lender stipulated. When the rate increases, the monthly payment also increases. So, you could suddenly find yourself with a much larger monthly payment that will increase again every 6 months or so.

Interest only loans are very popular. There are many variation of this type. Essentially, you pay the interest amount only while your principle balance remains unchanged. There's usually a fixed period for 3-7 years or longer where the interest rate and payments are fixed. After that, the program will change as stipulated. The main feature of this product is to keep the payment as low as possible for the duration of the term. The longer the term, the more time you have to refinance, hoping for a better market condition. Of course, you can pay extra toward your principle periodically thus lowering your debt. As your principle decreases, the monthly interest charged also decreases. Therein lies the best feature of this product. Since interest only loans are usually offered at a lower rate than fully amortized loans, you can use it to save on interest charges by paying down the principle each month (at least in the same amount as you would in a fully amortized loan). But keep an eye on mortgage interest rates. Don't be caught having to refi when rates are bad.

Fully amortized fixed rate loans are by far the most convenient. Once it's done, it's done! Your monthly payment will not go up nor will your interest rate. Common durations for this product are 30-40 years. When you're finished, you own the house free & clear! The downside? Monthly payments are usually higher than the other products. Also, your tax deductible mortgage interest amount lessens each year.

Other considerations include loan origination fees, escrow fees, and points. Points are upfront fee lenders charge to give you certain conditions of the mortgage product such as improved interest rate and/or longer fixed rate periods. Points, like loan fees and mortgage interests, are tax deductible. If you're buying a home late in the year, you might consider paying higher points to gain lower interest rate since your tax deductible interest amount for the first year wouldn't amount to very much otherwise. This makes sense if it helps your tax picture and gets you lower rate as well. Check with your tax accountant.
Often, you can get a motivated seller to pay your points (so you get better interest rate) as part of the negotiation. This obviously saves you money. But for me, I'd rather pay the points but have the seller give me the equivalent amount toward something else like allowance for new carpets, appliances, upgrade, etc., so I can get the tax savings as well. To do this, you should confer with an escrow officer as to how the escrow instruction should be worded. Lenders can be very particular about such matters because it can effect certain aspects of the loan.

As you can see, how you choose to finance your purchase can be a big part in determining which house you buy. Your monthly payment can vary dramatically for the same amount borrowed.  Similarly, what professionals you choose to assist you can make a world of difference in your decision process. The choices you make will be the difference between a dream fulfilled versus a nightmare. Professionals that can assist you include realtor, lender, escrow officer, home inspectors, trades people (contractors), and those in related fields. Choose well by equipping yourself with good information and keeping close touch with those you chose to help you.

For help in finding mortgage lenders in Morro Bay, Los Osos, San Luis Obispo & Cayucos, please visit http://www.PedersenRealty.com or Contact me