Mortgage Rates

To determine how much house you can afford you will need to take into account several things including your income, other debt you might have, as well as the amount you have available for a down payment.

It's also important that you factor in all the costs of a mortgage. This means considering not only the principal of the loan, but also interest, taxes and insurance.

This calculator can help you determine your potential mortgage payment, and that will allow you to figure out exactly how much house you can afford.

You should be able to get a home loan even if your credit score is in the 500s, but then you're in the market for subprime loans only.

Subprime loans have interest rates that are a couple of percentage points higher than those offered to prime borrowers. Subprime loans also often come with additional fees.

Obviously, a better credit score grants you access to lower interest rates and better terms.

An Adjustable Rate Mortgage (shortened to ARM) is a mortgage where the interest rate on the mortgage varies. In an ARM, there is an initial period of a fixed rate, then the interest rate changes. When compared to a fixed rate mortgage, an adjustable rate mortgage differs because the interest rate will change over time to match the market. Specifically, banks will link the interest rate on an ARM with certain indexes.

Each ARM is defined by a few major criteria. First of all, the initial interest rate and the initial interest period. The initial interest rate on an ARM will be defined by the bank. As a general rule, this interest rate will be lower than a fixed rate mortgage, in order to make the ARM more attractive to customers. The initial interest period is the length of time that this fixed interest rate will be applied. In a 5-1 ARM, the 5 indicates that the initial interest period is five years long.

The next major part of an ARM is how the interest rate will change. In an 5-1 ARM, the rate will change every 1 year. If a mortgage were a “5-2” ARM, the interest rate would change every 2 years. The change of the interest rate will depend on what the ARM is linked to. If the index that the ARM is linked to has increased, then the rate of interest on the mortgage will increase, and the mortgage will become more expensive overall.

Because the economy generally improves over time, an ARM usually will cost more, not less, than its original fixed rate. A fixed rate mortgage is generally a better option for home-buyers. At this time, fixed rate mortgages are at incredibly low interest rates due to the financial downturn. There is not really any reason one would go with an ARM instead of a fixed rate right now.

In addition to the increase in cost over time, ARM's have also had a bad reputation with errors. Banks admit that “up to 50% of ARM's” are miscalculated, causing homeowners to pay more than they should.

Sources:

https://www.nytimes.com/1994/07/23/business/costly-errors-lurk-in-some-mortgages.html

https://homeguides.sfgate.com/definition-variable-rate-mortgage-8870.html

https://articles.latimes.com/1991-09-22/business/fi-4310_1_adjustable-rate-mortgage

You cannot use a credit card for a down payment on a house. Home sellers and lenders do not accept credit card payments directly. Mortgage lenders typically require down-payment funds to spend at least 60 days in a bank account to get “seasoned.” Besides, credit card limits generally are not high enough to accommodate a down payment for a house.

Even if you could use a credit card for a down payment on a house, it is not a good idea. It would almost certainly result in high credit utilization and an increase in your debt-to-income ratio. That could cause a drop in your credit score right when you're applying for a mortgage, which could in turn cost you thousands of dollars over the life of the home loan if the lower score results in a higher APR. It could also cause your mortgage application to be rejected.

If you really want to use a credit card for a down payment on a house, you could potentially do so in a very roundabout way. For example, apps like Venmo make it possible to move money from a credit card to a friend's bank account, and your friend could then transfer the funds to your bank account to get seasoned for a down payment on a house. But there are fees and daily limits to contend with. The other method is to take out a cash advance, which is very expensive and won't give you much spending power. A credit card's cash advance limit usually is a lot lower than its purchase limit, after all.

Here's why you shouldn't use a credit card for a down payment on a house:

• Major lenders do not accept down payments via credit cards or third-party money-sharing apps.
• Mortgage lenders typically require down payment funds to spend 30-90 days in a bank account to get “seasoned.” Sixty days is most common.
• Fannie Mae underwriting standards require at least two months of deposit-account history to verify cash used as a down payment. In unusual circumstances, such as through Fannie Mae's HomeReady program, “cash-on-hand” can be used without “seasoning.”
• You could do a cash advance, via either an ATM withdrawal or a convenience check, to use for a down payment. But that's too expensive to make sense. Cash advances come with 3%-5% fees and high interest rates (over 20%). Interest also starts accruing immediately, with no grace period.
• A balance transfer credit card won't help you make your down payment, but it could save you some money after the fact. You'll have to take out your mortgage first, then transfer part of that balance to a credit card with a 0% balance transfer APR and a low transfer fee.

In the end, using a credit card for the down payment on a house isn't the best idea, if it's even possible. You won't be able to pay most official closing costs with a credit card, either. But there's usually a wide range of expenses associated with moving into a new home, and you can charge many of them to a credit card. They may include things like inspections and appraisals, for example.

Debt consolidation can affect buying a home either positively or negatively, depending on the timing. If you decide to consolidate debt right before buying a home or during that process, it will have a negative impact. Debt consolidation can result in a short-term drop in your credit score because of the hard credit inquiry required when applying for a loan or line of credit. Consolidation could also hurt your credit score by temporarily increasing your overall debt load due to a loan origination fee or a credit card balance transfer fee. A lower credit score could in turn cost you thousands of dollars if it causes you to get a higher mortgage APR than you would otherwise.

On the other hand, if you decide to consolidate debt well in advance of buying a home, it could make getting approved for a good mortgage much easier. Combining your debts into one balance with a lower APR should help you pay off what you owe faster. And if you wait until you pay off most of your balance, you'll be able to increase your history of timely payments and decrease your overall debt load. Both of those factors will improve your chances of getting a home loan with good rates. You may even be able to buy a home sooner than expected because your existing debts get paid off quicker.

So, rather than buying a home immediately after getting a new loan or credit card for the purpose of consolidation, wait at least a few months until your credit score can bounce back. In other words, use debt consolidation to prepare for a mortgage application instead of trying to do both at once. Below, you can learn more about the various factors to consider when trying to schedule debt consolidation around a mortgage application.

How Debt Consolidation Can Affect Buying a Home:

• Hard inquiry: Applying for a debt consolidation loan or balance transfer credit card results in a hard inquiry into your credit history. This will drop your credit score by 5 - 10 points for several months. This will make it harder to get a good mortgage in the meantime.
• Debt load increase: Fees associated with some forms of debt consolidation can actually increase the amount you owe in the beginning by up to 8%. For example, some loans charge origination fees to open the account, and many credit cards charge fees on balance transfers. That's significant because lenders consider total debt load when evaluating home loan applications.
• Increased credit utilization: If you consolidate your debts onto a new credit card, your credit utilization ratio may go up. That in turn can have a negative impact on your credit score and therefore your home-loan approval chances.
• Long-term score improvement and debt reduction: While debt consolidation can have negative effects in the short-term, it can boost your ability to buy a home if you consolidate months or years before you buy. You'll reduce your debt load and build up a solid payment history, both of which are essential for improving your score.

The bottom line is that when applying for a home loan, it's best to have the highest credit score and the lowest amount of pre-existing debt possible. You'll need a credit score of 620+ (preferably 660+) for a conventional home loan, according to Experian. And Zillow recommends a debt-to-income ratio of 36% or less when buying a house, and no more than 50%.

So, you probably can buy a house right after consolidating debt, but you may not want to. Rather, it's best to consolidate your debts well in advance so that you can improve your credit and reduce your existing debt load as much as possible before you begin the home-buying process.

If you want to track your credit score from consolidation through the home-buying process and beyond, create a free WalletHub account. You will be able to see how your score changes every day. You'll also get personalized tips on how to improve.