Buying your first home is a huge milestone. Before you take this big step, consider the following.
The bigger your down payment, the better
The first rule about applying for a mortgage is simple: the bigger your down payment is, the lower your monthly payments will be, and the less interest you will pay during the life of your mortgage. Also, if you make a down payment of 20 percent or more, you’ll avoid paying private mortgage insurance (PMI), a premium added to protect the lender in the case of mortgages that are considered higher risk.
There may still be low down payment options
If you don’t have a lot of money to put down on a house, don’t despair. FHA loans allow you to make a smaller down payment and still take advantage of competitive interest rates. Keep in mind however that you'll likely have to pay mortgage insurance if you choose an FHA loan with a low down payment.
The key is balance
Your mortgage is likely to be your single biggest expense, so it’s important to balance the size of your monthly payments with other aspects of your financial life. There’s no set rule for how much you should spend on a home. Some experts say you shouldn’t spend more than two-and-a-half times your yearly income. Others will say that no more than 35 percent of your monthly income should go to living expenses, including your mortgage and utilities. Just make sure you create a budget that will enable you to meet all of your financial responsibilities.
Before you go house hunting, have a lender pre-approve you for a mortgage. The lender will ask you questions about your income and expenses and help you determine a borrowing level that is comfortable for you. This will enable you to save time by only looking at homes within your price range. You will also be in a position to make an offer on a home that won’t have to be conditional upon obtaining financing.
Do your homework
One of the most important things you can do is learn about the different kinds of mortgages available so you can choose the best one for your needs. You have several options:
- Fixed-rate mortgages let you borrow money at an interest rate that stays the same for the life of the loan.
- Adjustable-rate mortgages (ARMs), have rates that fluctuate according to the market.
- Hybrid mortgages have fixed rates for a certain period and then switch to adjustable rates. For instance, a 5/1 ARM lets you pay a fixed rate for five years and then adjusts your rate annually after that.
- Option ARMs give you several payment choices each month, from a low interest-only option to a fully amortized payment.