It’s important to understand your financing choices when reviewing multiple options for Kansas City home loans. Knowing how much you can spend when shopping for a new home makes the process easier and less stressful.
Know the Difference Between Fixed Rate & Adjustable Rate Loans
There are two main types of Kansas City home loans: fixed rate and adjustable rate. Most homebuyers opt for fixed-rate mortgages because they are consistent and easy to understand. Your monthly mortgage payments remain the same throughout the life of your loan. The greatest benefit of a fixed rate mortgage is inflation protection. Fixed rate loans are not affected by changes in the market, so if interest rates go up, your rate will stay the same. In addition, the longer your loan term, the smaller your monthly payment will be. Many Kansas City home loans also have adjustable options. While adjustable rate loans have initial fixed periods during which their interest rates will not change at all, the interest rate will change over the life of the loan during adjustment periods. These fixed periods are typically 3, 5, or 7 years and after the initial fixed periods, with the rate readjusting based on current market trends.
Clean up Your Finances
Your credit score is one of the most significant factors that determines your home loan options. Credit scores influence:
- How much home you can be approved for
- What your home loan interest rate will be
It’s a good idea to check your credit report before applying for Kansas City home loans. This will give you the opportunity and time to correct any errors or pay off unresolved debt. Some errors can take 3 months or more to be fixed.
Identify Your Debt-to-Income Ratio
To qualify for a mortgage, you first have to figure out what you can afford to pay per month. Analyzing your finances and creating a monthly budget can help you narrow down the types of Kansas City home loans that may work best for you. You can start is with a realistic debt-to-income ratio. This ratio gives a clearer picture of what you can spend on housing without having to scrimp and save on other items you need.
How to Calculate Your Debt-to-Income ratio
A good rule of thumb is to never make your mortgage payment (including taxes and insurance) more than 30% of your monthly income. This will ensure that you will be able to make payments consistently without stretching your budget too much.
- Add all the payments you make per month towards your debt, including credit card payments, car loans, investment loans, payday loans, and housing expenses
- Divide your total monthly debt payments by your gross monthly income
- Multiple the divided number by 100 to get your ratio as a percentage
If that percentage is less than 30%, you should be ready to apply for a Kansas City Home Loan.