Congratulations! If you’re reading this article, then it means you are considering buying your first home. Pat yourself on the back. For first-time home buyers, the process can no-doubt be daunting. A house is not just a home but an investment in your future, and for most people houses are the largest purchases they will make in their lifetime.
Needless to say, buying a home is a significant life milestone.
If that sounds intimidating, don’t worry. Buying a house is a commitment, but the right home is essential and will be a big part in your living a happy and fulfilling life.
Here are some tips that to help you make the best decision for your home-buying needs.
- How Much Can I Afford?
We’ve all seen shows like House Hunters, where they feature beautiful homes in exotic locations with outrageous budgets, and thought “Wow. I want to live there.”
As great as a three-story mansion with a tennis court and pool may be, or even a mid-sized home in a gated community, it’s important to remember not to go beyond what you can afford.
The “right home” is the home that fits comfortably within your budget.
The general rule of thumb is that monthly debt should not exceed more than 42% of your gross income in a given month. Factor in your regular monthly expenses such as insurance, student loans, car payments, mobile phone plans, or any other loan payments that you may have. Calculate how much flexibility you have to take on additional debt by adding up your expenses compared to your overall income.
If possible, pay off an existing debts that you can before you start making progress on your home buying adventure. Smaller debts that are outstanding on your credit card and for your car should be paid off as soon as possible. Paying off outstanding debts improves your credit score, increasing the likelihood you will be approved for a mortgage and receive a beneficial rate.
Mortgage payments, property taxes, homeowners insurance, utilities, and even possibly dues if your home is part of a H.O.A., will also all factor in to your regular monthly expenses. Not to mention that life happens and, inevitably, you will be faced with things breaking and being in need of repair. It is a necessity to have enough money saved for these “in-case-of-emergency” moments that will eventually occur.
- Other Factors To Consider
When it comes to home buying, there are a number of non-financial factors that you should consider.
A house and a home are not necessarily one and the same. Depending on your preferences and needs, a townhouse or a condo may be better suited for your lifestyle. Likewise, homes themselves come in various shapes and sizes. Some homes are move-in ready, coming complete with furniture, appliances, and décor, making them possible to live in as soon as the closing is complete. Other homes may come with necessary adjustments or could be a fixer-upper.
The term “starter home” exists for a reason. The house you buy now doesn’t have to be the home you live in forever. Homes generally appreciate in value and accrue equity, making it a good investment for your developing portfolio. But homes are not just investments. They are spots where you will live, eat, sleep, and spend the majority of your time. They will be the epicenter of your life.
Things like the distance to work, the school district, and the local community are all factors that come into consideration when deciding which home is ideally suited for you.
Watch: How Do I Get a Mortgage?
Houses are rarely purchased with one lump-sum. That means chances are, if you’re buying a house, you’ll need a mortgage. Mortgages provide the majority of the funding for a home with an additional down payment. Down payments are typically only 20% the sale price and can be as low as 3-5% on a conventional loan. At a 20% down payment, home buyers can avoid having to pay additional mortgage insurance payments.
The most basic type is what is known as a “fixed-rate” mortgage, or “FRM”. These loans offer a simple, fixed interest rate for the life of the mortgage, typically lasting either 15 or 30 years. These types of mortgages are popular because they guarantee a level of stability that becomes easy to fit into your long-term budget. For 30-year mortgages, monthly payments are lower than their 15-year counterparts, but the overall cost over the life of the loan is greater. Likewise, 15-year mortgages have higher monthly payments but lower interest rates.
For example, imagine you’re buying a home at a price of $125,000 with a down payment of 20%, or $25,000. You would take out a loan for $100,000. At a 30-year, fixed rate, with 4% interest, you would pay a payment of $760.75 per month. Over the life the loan, you would repay a total of $273,870. At 15-year, fixed rate, with 3.5% interest, you would have a monthly payment of $1,035.09, but would only spend $186,316 over the mortgage’s lifetime. These estimates do not include additional costs associated with taxes or insurance.
The other most common type of mortgage is known as an “adjustable-rate” mortgage, or “ARM”. These types of mortgages offer interest rates that vary with time. There is a level of risk with ARMs as interest rates can increase, and you can end up spending more money on monthly payments than you intended.
However, when interest rates are high, these types of mortgages can be appealing because they tend to offer an initial rate lower than FRMs, leading to lower overall monthly payments, with the likelihood of the interest rate decreasing over time. Likewise, this mortgage option is also useful for shorter-term loans as there is less of an opportunity for the interest rate to increase.
For people with lower credit scores and may not qualify or benefit from a conventional option, other mortgage types do exist.
Government backed mortgages are offered by the Federal Housing Administration (FHA), the US Department of Agriculture (USDA), and the department of Veterans Affairs (VA). These loans generally offer better interest rates with lower down payments. FHA loans, for example, have a minimum down payment of only 3.5%. USDA loans, in fact, do not require any down payment.
Government backed mortgages can be a great option for first-time buyers who qualify, such as those who served in the armed forces or who live in rural areas.
Financial institutions all offer different rates, so look around to find the best fit for you. Typically, credit unions can offer lower interest rates compared to bigger banks because of their status as a non-profit organization.
Florida Credit Union is a full-service mortgage lender, offering all of the aforementioned mortgage types. Our team of mortgage originators will help through the process of pre-approval through closing and answer any questions you might have. Our goal is to get our members into their dream homes.
For more information, visit our website at https://www.flcu.org/Personal/Borrow/Mortgages.