The Complete Guide to First Time Home Buyers
Buying your first home? Excellent! This is such an exciting time for you, but of course it can seem daunting. Perhaps you're finding it difficult, and you're tempted to just jump on the first house that looks remotely suitable.
Think of buying your first house the same way you think of buying a pair of shoes - if they don't feel comfortable in the store, they're never going to feel right later.
Here's a first time home buyers guide to get you going:
What are Your Long Term Goals?
What are you looking for in your first home? How will this purchase fit with your lifestyle? When you're buying a residential property, you're choosing from a traditional single-family home, a condo, a town-house, or a multi-unit building that might help you raise money to pay your mortgage. Each has pros and cons. You're going to want to be flexible, but make sure that you understand that this purchase has to fit your needs over the long term, so think about the kind of neighborhood you want to live in, the size of house you want, and even the little details like how many bathrooms you want.
Understand what you're getting into
First-time home buyers may find the complexities of mortgages and interest rates a bit difficult to absorb. How favorable a rate you'll be able to get on your mortgage depends on a number of factors, including whether you qualify for government assistance under FHA or first time home buyer programs or whether you're qualified under a conventional mortgage. It also depends on how much of a down payment you're able to make. Interest rates are fluid, and the rate you're quoted today may not be the same rate you'll be quoted tomorrow.
There are various online mortgage calculators that can help you to determine your cost of borrowing, and various types of assistance available, but it's important from the outset to have a basic understanding of how a mortgage works, and how it's paid off.
What is a Mortgage?
A mortgage is, in essence, a long-term loan that enables you to buy a house. Under the terms of the mortgage, you repay the principal amount (the price of the house), and interest payments. The home and the land on which it is built provide the collateral for the loan. Almost everybody who purchases a new home will need a mortgage. Usually a down payment of 20% is desirable, but there are first time home buyer programs that can allow lower down payments.
The two factors that determine your monthly mortgage payment are size and term. Size is the amount of money you borrowed. Term is how long you take to repay it. Most people prefer small monthly payments, and therefore a longer term. Right now, 30-year mortgages are the most common.
How Much Mortgage?
Think about how much money you're actually going to be willing to shell out, and how much your lender thinks you can afford. Maybe you've fallen in love with a $300,000 home, but your lender thinks that $200,000 is more within your range. Consider how much other debt you're carrying, and proceed accordingly.
Sometimes, banks will lend you more money than they really should. That's because they want to make money off your loan, and they really don't care all that much about whether you go hungry making huge mortgage payments. So think about what you can realistically afford.
How is a Mortgage Payment Calculated?
Four factors determine the mortgage payment:
Each month, a portion of the payment goes toward the principal. In the early years, very little is applied to the principal - it's mostly interest. As the years go by, more is applied to the principal, and by the end of the mortgage, the principal is paid down. You can use a mortgage calculator to find out monthly mortgage payment.
The interest on the mortgage is the reward that the lender gets for taking a chance on the borrower and lending him or her money to buy a home. Low interest rates increase the amount of money that the home buyer can borrow, and high interest rates reduce the amount. The higher the mortgage interest rate, the higher the mortgage payment! So, as an example, on a mortgage of $100,000 at an interest rate of 6%, the monthly payment over 30 years would be right around $600. At 9%, it's more like $805. So in simple terms, as a first-time home buyer, you want the lowest rate possible. Calculate the mortgage using mortgage calculator.
Taxes and insurance can also be included in the mortgage payment, but some borrowers choose not to include them. They get a lower mortgage payment, but have to pay the taxes and insurance on their own.
When You're Ready to Buy
Now that you're ready to go for it, keep in mind that you're going to have to keep your sanity intact. This is a tough time - there are going to be offers and counter-offers flying all over the place, but you can get through it. Right now, your real estate agent is your best friend - you can drive around the neighborhood, look at houses in Orange County, California, and find what you need. Make your agent work - it's what he or she is there for.
Think About Your Financing
As a first time home buyer, you have tons of options, including homebuyer loans that don't have a high down payment, and federally backed loans. You might even be able to take advantage of state-backed first time home buyer programs.
Making an Offer
Your real estate agent can help you determine how much you're going to offer for your new home. Then your agent presents an offer to the seller, and you can come back with a counter-offer. You continue to dicker back and forth until you come to an agreement. Then you get your house!
This should be considered just a very brief overview of how mortgage payments work, with emphasis on the importance of getting the lowest interest rate possible. If the structure of your mortgage permits, you can lower your cost of borrowing by making lump sum payments on the principal. By understanding the exact structure of your mortgage with the help of a mortgage calculator, you can determine exactly how expensive it is going to be in the long run to finance the purchase of your home.
Ideally, you should take advantage of all the means available to you to secure a low interest rate. This can include FHA-insured loans or first time home buyer programs, which may offer a lower rate to first-time buyers. And because mortgage rates are constantly fluctuating, you should consult with your lender to determine the best course of action.
Once you've worked out a deal, you close. This means that you're going to have to deal with a lot of paperwork, but once it's done, congratulations - you're a homeowner!