Mortgage Advice for Los Angeles Home Buyers
If you are buying a home in Los Angeles in the near future, you will likely need to finance your purchase by obtaining a mortgage loan. If this is the first time you have purchased a home, you may want to learn more about the steps involved in financing a Los Angeles home purchase. While each purchase is as unique as the person buying the home, there are some common steps involved and some general information that will help you feel better prepared when buying a home in Los Angeles.
There are two basic types of mortgages that a borrower may qualify for when financing a Los Angeles home purchase—a fixed rate mortgage or an adjustable rate mortgage, or ARM. A fixed rate mortgage sets the interest rate for the term of the loan at the beginning of the loan. Your monthly payments will remain the same throughout the life of the loan. Fixed rates loans have traditionally been for 30 years; however, 15 year fixed rate loans are gaining in popularity. An ARM, on the other hand has an interest rate that is subject to change. The interest rate for an ARM is determined by what is known as the index and the margin. The index is determined by the market and is published by a neutral third party. The margin reflects the number of points agreed upon in your loan that are added to the index to arrive at the interest rate for your loan. In a typical ARM, the rate will stay the same during the “initial rate period” which could last from one month to ten years. After that, the rate will fluctuate in relation to the index and margin. Most ARMs also have built in caps that only allow the rate to fluctuate a certain amount during a year and/or over the period of the loan.
As a general rule, the interest rate for an ARM during the initial rate period will be lower than that of a fixed rate; however, this is because the borrower assumes the risk of the rate increasing once the initial rate period is over. Again, as a general rule the extent to which the rate is lower will depend on the length of the initial rate period. The shorter the initial rate period is the lower the starting interest rate will be. Interest rates for anyone planning on buying a home in Los Angeles are historically low as we begin 2013. Rates for a 30 year fixed rate loan started at around 3.3 percent as we entered January. Rates for an ARM run from about 2.3 percent to 3.0 percent depending on the length of the initial rate period.
It is important to remember that the rate you are offered when financing a Los Angeles home purchase will depend on a variety of factors. Only those borrowers with an excellent credit score and a lengthy work history showing earning potential sufficient to justify the loan will qualify for the lowest rates. First time borrowers may not be offered the lowest rates. Likewise, a borrower with a credit score below about 720 can expect to be offered higher rates. Be sure to talk to an experienced Los Angeles real estate agent before you start the process of buying a home in Los Angeles so that you know what rate you will qualify for and, therefore, how much home you can afford.