f you’re considering buying your first home soon, then you’re likely a little daunted by what lies ahead. When you understand a few fundamentals about the home buying process, however, buying a home need not be something you harbor anxiety over. Here are some basic financial things that you should know before you go out and buy your first home.
The ideal down payment is 20%.
There are a number of reasons that putting 20% down on a home is advantageous. First, it’s instant equity, and it makes you a more appealing home buyer to mortgage lenders. Second, you’re more likely to secure a lower interest rate. Third, you won’t need to take out quite as much on loan. And fourth, you can avoid paying mortgage insurance (more on than below).
A down payment is a good investment.
On a related note, it’s important to consider why putting your money toward a down payment might be better than, say, going with a zero-down loan and investing the money you would have spent on a down payment. The benefits mentioned above should give you an idea. Moreover, if you were to invest your down payment instead, you’re more likely to lose it in stock market fluctuations.
You may need to pay mortgage insurance.
In fact, if you’re planning on putting anything less than 20% down on your home, you should assume that you’ll be paying for mortgage insurance. Mortgage insurance essentially exists to allow homebuyers to put down less than 20% on a home; it helps to offset losses if for some reason a homeowner is unable to repay the mortgage loan. Mortgage insurance typically costs about $55 per month per $100,000 financed, but it can cost much more. You can read this article to learn more about mortgage insurance.
Don’t spend every dollar you qualify for.
Coming down in price will generally give you more options on the market, and it will grant you precious freedom later as you seek to make upgrades to your home.
Flaws found during the home inspection can affect price.
Your home inspection should be thorough, surveying even portions of the home that are advertised as “new.” And if any flaws are discovered in the home during the inspection, you can use them to your advantage when negotiating price. If a roof is advertised as new, for example, when in reality there is simply a newer layer of shingles over an older layer, you might be able to negotiate a lower price for your home.
You should create a bid strategy beforehand.
Sticking within your budget can be difficult, and making big financial decisions once you’re already emotionally invested in a home is never a good idea. It’s always best to come up with a bidding strategy beforehand to help eliminate stretching yourself financially later. You might, for example, decide to low-ball it with your initial offer, agreeing to offer $1,000 over any competing offers up to a particular dollar amount. So if you’re starting with a $400,000 offer, you might decide beforehand that you will bid $1,000 over any higher offers, up to your $425,000 budget.
There are other costs you haven’t considered.
Buying a house involves much more than simply acquiring a loan and settling on a monthly mortgage payment amount. It’s even much more than paying your principal, interest, homeowners insurance, mortgage insurance, and HOA fees each and every month. There are additional costs to buying a home that you probably haven’t considered, such as home inspection costs, survey costs, property taxes (often prepaid at closing), government recording charges, appraisal fees, lender’s origination fees, title services, etc. Many home buyers call these things “hidden costs,” but they really are a part of the home buying process for everyone.
Don’t forget those general costs of homeownership that you’ll be paying as well. If you’ve never had need for a lawn mower, for example, and now you are going to have a backyard, a lawn mower investment is in your near future. If you’re not used to paying for kitchen appliance repairs, now is a good time to get ready. If you’re getting more space than you’re used to, you’ll probably be buying some new furniture. Or if there are areas in your home that you’re planning to fix up, you’ll have to plan for that financially, as well. Owning a home requires more upkeep than renting one does, so be sure to do what you can to give yourself a financial cushion in that respect.
By: Maurine Anderson