There’s a common misconception out there that buying a home with cash is always a faster and easier option than financing. If you have the funds to buy a home in cash (congrats on that saving, by the way), financing might actually be a better option. Financing your purchase with a qualified lender offers homebuyers a host of unique advantages that cash buyers just can’t enjoy. If you’re weighing your cash vs. financing options, consider the following:
Buying a home can be a high stress time and it feels even more stressful when you don’t understand the lingo being tossed around. From abbreviated words in listings to acronyms used by real estate agents and loan officers, sometimes it can feel like everyone is speaking a different language. Knowing these acronyms will keep you on the same page as everyone you are working with.
Components of a Mortgage Payment: PITIA
- P stands for Principal or the amount you borrowed.
- I stands for Interest. Lenders charge interest for the money you are borrowing. The interest generally reflects prevailing market rates based on investor demands.
- T is for property taxes.
- I represents Homeowners Insurance premiums (hazard insurance), which is mandatory.
- A stands for Association, as in homeowners association. For some residential properties, HOA dues are required.
Fixed Rate vs. Adjustable Rate
- With a fixed-rate loan, the interest rate charged by the lender never changes over the life of the loan. That means the P (principal) and I (interest rate) portion of your PITIA payment will not change. However the T (taxes) and I (insurance) portions may change if your taxes or insurance premium change. Many people prefer the stability of a fixed-rate loan.
- With an adjustable-rate loan, the interest rate can increase or decrease. There are a large variety of adjustable-rate mortgages (ARMs).
Government Loans vs. Conventional Loans
- Government loans include VA loans guaranteed by the Veterans Administration, FHA (Federal Housing Administration) loans administered by the U.S. Department of Housing and Urban Development (HUD) and USDA Rural Loans insured by the U.S. Department of Agriculture.
- If a loan is not insured or guaranteed by a government agency, it is considered to be a conventional loan. These loans are often purchased by Fannie Mae and Freddie Mac, although this purchase is typically invisible to the member. If you have less than a 20 percent down payment, you will likely need private MI. The advantage of MI is that you need less upfront cash and can buy your home sooner.
Length/Term of the Mortgage