Last week we reported long term strategies to follow before shopping for your first house. Liz Pulliam Weston with MSN Real Estate suggests the following timeline as an ideal one for someone purchasing their first home and for the most part, we agree with her. This week we will talk about more immediate strategies.
Learn about mortgage options. While the mortgage market has settled back to more ‘normal’ conditions it can still be confusing tangle of unfamiliar terms and acronyms. ARMs, FHA, VA, LIBOR, are all a part of the mix. The author recommends sticking with the traditional 30 year fixed rate. But be aware that even though the interest rate is fixed, increasing costs for insurance and taxes will cause even a fixed rate payment to increase over time. Don’t rule out adjustable rates. In today’s market no lender is going to let you borrow more than you can afford. Shop for a mortgage without mortgage insurance. Usually a lender requires you to provide mortgage insurance with a down payment of less than 20%. Less than 20% down means more risk to the lender and mortgage insurance protects them against an eventual default.
Start calculating how much house you can afford. Your housing expense should not exceed 25% of your gross income. That includes your principal and interest payment, taxes and insurance. Once you have decided how much you can afford you can always opt to pay taxes and insurance separately, assuming your lender will allow that. Think of it this way-they accumulate money on a monthly basis for annual payment of taxes and insurance. And – they don’t pay you interest. If you’re a good saver, then put the money to use yourself. Of course, if your habit is to live paycheck to paycheck you’d better let the bank take care of it.
Research all of the costs of owning a home. When you purchase a home there are so-called ‘closing costs’ associated with the transaction. These can take the form of origination fees paid to the lender for providing the funds. Origination fees are actually pre-paid interest and are a variable proportionate to the interest rate you pay. Documentary stamps, title insurance, proration of taxes, title insurance, you can expect to pay anywhere from 1-3% (of the mortgage) over and above your down payment. Drop into the local bank and ask for a Good Faith Estimate (GFE). Find out what utilities will cost in your new home. You can always ask the current owner for copies of their bills, but be aware that this can only be done after a property is selected and no two families will use utilities identically.
Attend a home buyer’s seminar. Many banks or banks in association with real estate firms will put on free seminars for first time buyers. Obviously they are hoping to obtain your business but it is usually a low pressure non threatening atmosphere in which to learn more about the process.
Adjust your saving strategies. By now you’ve begun to save for your new home. But what you’ve learned may cause you to increase your savings. A bigger down payment means you can afford more home and may mean you can avoid buying mortgage insurance. It also means lower payments and more discretionary cash.
Next Week: 3 months out