Buying a home is one of the most exciting events in your life and is likely to be the most expensive purchase that you will ever make. Here are some things to consider before you make the commitment.
- Have you saved enough money for the down payment? You must have job stability and a steady income.
- What is your estimated monthly payment for the home? In addition to the monthly payment foe principal and interest, you will have to pay for taxes and insurance, and possibly homeowner association dues.
- What is your estimated monthly payment for the home? In addition to the monthly payment foe principal and interest, you will have to pay for taxes and insurance, and possibly homeowner association dues.
- What are the other costs of owning a home? Be realistic about costs such as heating, air conditioning and other utilities.
- What can you afford? Be confident that you can make the monthly payments.
The Total Cost of a Mortgage
These four cost components equals the monthly mortgage payment you will pay each month:
Principal + Interest + Taxes + Insurance (PITI) = Total Cost of Your Mortgage
- Principal represents the amount you borrow, which has to be repaid over time.
- Interest is the cost that lenders charge for the use of their money
- Taxes is an assessment that local governments collect on property to pay for local services. Property tax rates will vary by location and can affect your total cost and affordability
- Homeowners Insurance will be required to replace the value of the loan in the event of a disaster such as fire, hail, flood, etc.
Many times buyers ignore these additional costs when figuring how much of a home they can afford.
Types of Loans
- Conventional and Government Loans
- FHA and VA loans are government loans. All other loans are generally classified as conventional loans.
- FHA Loans
- The Federal Housing Administration (FHA) is part of the U.S. Department of Housing and Urban Development (HUD). FHA administers various mortgage loan programs that have lower down payment requirements and can be easier to qualify for than conventional loans. FHA loans have statutory limits.
- VA Loans
- VA loans are guaranteed by the U.S. Department of Veterans Affairs allowing veterans and service persons to obtain home loans with favorable terms and often without a down payment. While it's easier to qualify for a VA loan than a conventional loan, lenders generally limit the maximum VA loan to $417,000. The VA doesn't make the loans, but recommends you via a certificate of eligibility to your lender.
- Fixed Mortgages
- Any Fixed Mortgage locks in the interest rate for the length of the loan. While you can always refinance, a fixed rate insulates you from increasing rates, but keeps you from automatically enjoying rate declines.
Mortgage Insurance
A government-backed or privately-backed policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price. The cost for mortgage insurance is usually built into the monthly payment made to the lender.
Mortgage insurance makes it possible to buy a home with as little as 3.5% down.
Escrow Accounts
A mortgage escrow account is an easy and simple way to manage your annual tax and insurance payments and put them on autopilot. The
biggest advantage of using an escrow service is not having to come up with large payments once a year to pay your bills. It is much
easier for most people to pay $200 per month into a forced savings account instead of paying $2400 at once. Mortgage escrow accounts
also guarantee your bills are paid on-time. Your payments have already been budgeted for you and the money is waiting and available in
your account. When the bill is due, the escrow account takes care of everything for you. It is nice not to have to remember payment
dates, amounts, etc.
There are advantages to the lender and county as well. The lender is assured your insurance premiums will always be up to date, so their asset (your house) is protected in the event of destruction. The county is assured they receive their property tax payments on time.
There are disadvantages though - most escrow accounts do not earn the account holder interest, though some earn interest at a low rate. For someone with a large house and a $10,000 property tax bill, that adds up to a lot of lost opportunity every year. There are also associated fees which cut into your bottom line.
- Can you avoid using an escrow service?
- Yes, but not always. Some mortgages require escrow accounts, especially for first time home buyers or home buyers with small down payments. There are some advantages for going without an escrow service - your money can earn you interest and you may be eligible for early payment discounts for some bills. But the disadvantages are obvious - you are required to pay your tax bills and insurance payments on time or risk losing your house.
Loan Pre-Qualification
Loan Pre-qualification will strengthen your negotiating position with the seller. Ask at least one lender to pre-qualify you for a mortgage. The lender will analyze your credit position, current income, and outstanding debts to give you a reasonable estimate of your borrowing amount. There is no obligation on you to obtain a loan from that lender, nor does it obligate the lender to provide a mortgage loan.
Shopping for a loan
Shopping for your loan is probably the most important step in your home-buying process. Mortgage brokers and lenders have a wide variety of mortgage products. The type of loan product and your interest rate will not only influence your total settlement costs but will determine the amount of your monthly mortgage payment. A great rate on the wrong loan can cost you thousands. That is why working with an experienced Loan Officer is key.
Need help selecting a loan officer? Ask one of our agents.