Buying your first home can be an exciting and stressful experience. There are so many variables to consider when it comes to buying a house, which makes it difficult to know where to start. If you're thinking about buying your first home and want some guidance, this article will walk you through the process step by step.
Defining The Terms: What is a Mortgage?
Mortgage: Is a type of loan that allows you to buy a house. Your mortgage acts as an agreement between you and a lender that provides you with the funds to purchase your home. If you fail to pay the monthly payments on the mortgage plus the borrowed interest as agreed upon, then the lender can seize your house.
Interest Rate: Is the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding, it commonly has monthly capitalizations which means it affects the total amount of the money borrowed every month.
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Some factor may affect the interest rates for your mortgage, including the Federal Reserve's (Fed) interest rates, since they are tied to Treasury Yields, as well as the type of mortgage you aquire, your credit score, among other details.
Your Credit Score and Buying Your First Home
Lenders use your score to determine if you are a good risk or not, based on what percentage of the amount borrowed you pay back on time (and avoid late payments), as well as how much new credit you have applied for recently.
Having a credit score of 620 or higher is essential if you're looking to purchase a home. A credit score is a three-digit number between 300 and 850 that lenders use to indicate your trustworthiness with credit; in simple terms, are you good for the money you are about to borrow from them – which is essential when purchasing a home. The more money you make and the more trustworthy you are with repayments, the higher your credit limit.
If your credit score isn't high enough yet but still close enough where interest rates from other lenders seem reasonable enough—say 7% instead of 8%, which would put it within reach based on savings goals—then consider paying off some debts before applying so that when you do apply later down the line, they'll take those extra payments into consideration during the approval process.
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Mortgage Options for First-Time Home Buyers
There are many different kinds of mortgages available to first-time homebuyers, and each will have its own pros and cons.
One type of mortgage you may be eligible for is an FHA loan provided by the Federal Housing Authority or FHA. FHA loans require lower down payments than conventional mortgages, and they also allow borrowers to finance up to 6% of repairs into the initial loan amount.
Another option is a VA loan provided by the Veterans Administration, which allows veterans who are buying their first home or refinancing an existing one to take advantage of low closing costs (or no closing costs at all), as well as special protections against foreclosure by private lenders during certain circumstances such as unemployment or divorce.
Conventional loans are another type of loan that you could apply for when purchasing a home. These loans typically require higher down payments than FHA loans, but still provide competitive interest rates with comparable monthly payments based on your credit score and other financial factors such as debt load compared with income level.
Adjustable-rate mortgages (ARMs) are a great way to save money on your monthly payments. If you're purchasing a house that costs less than $250,000, an ARM is likely your best option. An ARM will have a lower interest rate than a fixed-rate mortgage and make it easier for you to afford the home of your dreams.
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However, ARMs do come with some risks: if rates go up quickly after you take out the loan, then your monthly payment might rise as well. This is why these types of mortgages are best if you are planning to stay in your home for a period of two years.
You can save money by buying a house that requires improvements, but it's important to consider how long you'll be living in the house. You might also want to take into account any repairs or maintenance costs you'll have while living there.
As with any major purchase, you'll want to do some research of your own before making an offer on a property. The internet is full of great resources for learning about mortgages— and there are several different types of mortgages that are right for different people at different times in their lives.
Tools You Can Use to Select a Mortgage
Mortgage calculators can be found online and will help you calculate your monthly mortgage payments as well as how much of a loan you'll be able to qualify for. Here are a few options for an online calculator:
There are many other options available online, including the two mentioned above. Speak with your realtor for a better idea on which tool would be the most helpful in your area.
Is Zillow Enough, or Should You Ask a Realtor for Advice?
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Zillow is an excellent tool to use when looking for a house or trying to find a mortgage, but it's not the only tool. Asking a Realtor for advice is always a good idea if you want to make sure you're getting the best deal possible on your first home. A Realtor can help with everything from finding a good local lender, negotiating the best price, and reviewing contract paperwork to ensuring all disclosures are up-to-date and accurate.
Realtors work off of a commission that is paid for by the seller out of the sale of their home. It is ALWAYS advantageous for a buyer to work with a realtor to help with purchasing a property, since you won't be paying any fees.
Factor In Housing Appreciation
You should also consider the future value of the home as it increases or decreases over time due to a variety of factors known as appreciation. Homes tend to appreciate over time thanks to inflation, population growth, nearby commercial development, infrastructure improvements, and other factors that drive demand for real estate.
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For example, if you're looking at an older house in a city with relatively low job growth and high unemployment rates (e.g., Detroit), then you wouldn't expect it to appreciate much over time relative to other homes in better areas with strong economies (e.g., San Francisco).
Don't Wait Too Long To Submit an Offer
For many people, buying a house is the biggest financial transaction they will ever make. If you're going to take on this kind of responsibility, it's important that you don't procrastinate when it comes time to decide whether or not to buy. The longer you wait, the greater your chances of losing out on an offer because other buyers are eager to jump on deals.
You should be aware of the changes over the Federal Reserve (Fed) interest rates, these affect directly the mortgage interest rates, sometimes the Fed has to rise them to fight inflation, so consider when is the best moment for you to buy a house.
If the rates are high right now, get informed about how long it may take for them to shrink, maybe you can wait for that moment, if you can’t wait that long, you should act fast before they hike again.
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Buying Your First Home Can be Confusing, but Also Rewarding!
Before you commit to buying a house, it's important to learn how mortgages work and how much interest rates will affect your monthly payments. Once you've settled into your first house, all of this research, saving, and stress will be worth it!
