Home Buying Tips for First-Time Home Owners
December 2, 2020
Buying a home for the first time can be exciting and overwhelming at the same time. A home is often the biggest investment you’ll ever make, and depending on your goals and plans, this purchase could provide you with the place you’ll live and raise your family for decades to come. In other words, it’s not a decision to be taken lightly.
There are several things to consider as you start your home search. Things like the neighborhood and size of the home are certainly important, but before you start thinking about that, there are several other steps that you’ll need to take to set yourself up for home buying success. In today’s blog from Wonderland Homes, we want to provide you with some of the key actions you’ll need to take so you can buy responsibly and get the most home for your money. Keep reading to learn more.
Know Your Budget
First and foremost, you have to know your budget. It can be tempting to start looking at homes that are out of your price range. However, you don’t want to waste time and you certainly don’t want to fall in love with a house you can’t afford. If you don’t have a solid understanding of your budget and the costs involved in buying a home, you could overextend yourself and end up with a monthly payment that stretches your finances too thin.
There are three things you can do to help create a healthy budget and avoid any surprises.
Start Saving Early
Unless you already have a large sum of money tucked away for a down payment, you might want to start saving early. Having enough money to cover a larger down payment will not only provide you with more home buying options, but it will also save you a substantial amount of money in the long run.
The smaller your down payment, the more money you’ll have to finance and that money isn’t handed over to you for free. When you finance a mortgage, you have to pay interest on that money. Over the course of a standard 30-year mortgage, you’ll end up paying thousands of dollars in interest. If, however, you’re able to put down a larger down payment, not only will your monthly house payment be lower, but you’ll also pay less in interest over the life of your loan.
Determine How Much You Have for a Down Payment
If you’ve been saving for your new home purchase and are now ready to buy, take a good look at how much you have for a downpayment and what that will mean for your mortgage and monthly payment. Depending on the type of mortgage you get, you could be required to pay PMI (private mortgage insurance). This insurance can cost you an additional 0.25% to 2% of your loan balance per year until you have 22% equity in your home. Depending on how much you put down, it can take years of extra PMI payments to reach that level of equity.
Not having enough money to avoid PMI not only means handing over money that could otherwise be used to pay down the principal, but it could also have an impact on the type of home you can buy. If your budget allows for a $1500 a month house payment, but because you didn’t have a large enough down payment to avoid PMI that $1500 a month bill could turn into $1800 a month — which is well out of your price range.
With the cost of homes these days, a 20% down payment is not always feasible for many people. In those cases, you may choose to provide a smaller down payment and pay PMI instead of waiting years to buy the home you want.
Don’t Forget About Extra Expenses
In addition to your down payment, buying a home will come with additional expenses that you’ll need to consider. For instance, look at closing costs. These are the fees you pay to finalize your mortgage and they typically range between 2% and 5% of the purchase price. Some buyers will negotiate and ask the seller to pay a portion of the closing costs.
Closing costs and your down payment are two of the largest expenses you’ll need to consider when buying a home. There are several others that, although much smaller in comparison, can still add up when you put them all together so it’s wise to consider them in your overall budget. Some of these extra expenses include home inspections, repairs, home insurance, moving expenses, HOA dues, and upgrades.
Strengthen Your Credit Score
Your credit score will determine how much money you can borrow and at what interest rate it will be given to you. If you’re looking to borrow a significant sum of money (which most first-time homebuyers are) you’ll likely want to make sure to have a good credit score so you can borrow enough money to get the home you want. However, even if you’re given the amount you need to cover the cost of the home, if you have to pay a higher interest rate on it, it could push your monthly bill beyond your comfort level.
The strategy is to be able to borrow the money you need at the lowest rate possible to keep your monthly payment low and avoid paying thousands more than you have to in interest. You do this by strengthening your credit score since those with a good credit score will be rewarded with higher borrowing amounts and lower interest rates.
You can strengthen your credit score by paying your bills on time, keeping credit card balances low, and periodically reviewing your credit report, and contesting anything that looks like it could have been reported in error.
Determine Which Mortgage is Right For You
There are several different types of mortgages available, although many have certain stipulations. VA loans, for example, usually require no down payment but they’re only available to current and veteran military service members. If you’re concerned about being able to come up with enough money to make a substantial downpayment on your home, some loans are available to first-time buyers and they require as little as 3% for a down payment.
Keep in mind that there are also different loan terms available. 30-year fixed-rate loans are some of the most popular, but there are 15-year, 20-year, and even 40-year loans. The majority of loans are usually a fixed-rate — meaning the rate won’t change over the life of the loan. However, some adjustable-rate mortgages could be useful for some borrows as long as they understand how they work and the additional risk they could incur.
When it comes to choosing a mortgage, only you can decide which is the right one for your situation. While the majority of first-time borrowers will choose to get a 30-year fixed mortgage, keep in mind that if you’re able to make the payment using a 30-year mortgage you’ll not only pay off your home in half the time, you’ll also save tens of thousands in interest cost.
Compare Needs Vs. Wants
When you have all of your finances in order and you’re ready to buy a home, take some time to sit down and make a list of what’s really important to you. Do you want to be in a particular neighborhood or school zone? What is the minimum number of bedrooms you need? How far of a commute to work are you comfortable with? These are examples of deciding factors and no matter how much you like the look of a house or the fact that it comes with a hot tub, you shouldn’t make a decision to buy unless it’s in line with your core needs.
Get More Home Buying Tips and Find Your Perfect House With Wonderland Homes
Wonderland Homes is the premier home builder in Northern Colorado. Our homes are found in some of the most desirable communities in Timnath, Wheat Ridge, Windsor, and Castle Rock. We build energy-efficient homes that will not only save you money on your utility bills, but our homes are backed by an unprecedented two-year manufacturer’s warranty for your peace of mind. If you’re in the market for a new home, give us a call or browse our website. We’ll be happy to help you through the home buying process and find the perfect place to call home.