3 Things First-Time Home Buyers May Not Know
Your first home – how exciting! Whether you are looking to buy your first home now, or sometime in the future, it’s never too early to do your research. With the abundance of educational materials available, you may not know where to start. Forbes contributor and Certified Financial PlannerTM, David Rae, pointed out these three things that first-time home buyers should know, before they start shopping.
What You Qualify For vs. What You Can Afford
Mortgage financing usually starts with prequalification and then preapproval. Prequalification is a preliminary overview of your financial picture limited to information like income, assets, and debt. Preapproval is more in-depth and requires a formal loan application and more documentation. I use preapproval to determine how much you’re qualified to borrow and what interest rate will accompany your loan. However, just because you are preapproved for a specific amount, does not mean you need to take out a mortgage loan for that amount.
Before you make an offer on a home, determine how much you can afford. You can use the mortgage calculator on my website to estimate your payments based on your loan amount. It’s usually a good idea to take out a mortgage valued less than what you qualify for.
Understanding Different Terms
Mortgages come in a range of terms depending on the type of loan. Mortgages are available with anywhere from 30- to 15- to 10-year to even 7- or 5-year terms. Typically, the shorter the mortgage term, the higher the monthly payment will be.
Most homeowners will take out a mortgage with 30-year or 15-year terms. You can use the mortgage calculator on my website to compare the difference in payment between different terms. If you think you can afford the monthly payment of a shorter-term mortgage, you will pay more monthly, but save more on the cost of mortgage interest. You’ll also build equity faster, and ideally pay off your home sooner.
The Myth of the 20% Down Payment
Historically, home buyers went into their home purchase with a down payment of 20% or more. Saving for a 20% down payment is not always feasible, especially in heated housing markets. Many loan programs exist specifically with low down payment options, specifically for first-time home buyers. You will have to pay a Mortgage Insurance Premium (MIP) or Private Mortgage Insurance (PMI) because of the lower down payment.
If you are interested in a low down payment loan, it’s important to compare your options. In some cases, a lower down payment makes sense, and you can put your savings toward closing costs, home maintenance, or other expenses that may come up. In other cases, if a larger down payment can get you a better loan program, it may be better to put down more. You can compare down payment scenarios using the mortgage calculator on my website.
Buying your first home is exciting, and it’s okay if you don’t know everything else. I’m the expert, so let me know if you’d like any guidance on your first home purchase.
Sources: Bankrate, Forbes