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Financing a Home 101
Your home is the most expensive thing you will ever buy. As a result, buying a house comes with a host of intricacies and complications that you will rarely have to deal with elsewhere in your life. Though the world of mortgages, down payments and interest rates can be intimidating for the average homebuyer, there are a few things you can do as a homebuyer to make the process easier.
Do Your Research
This may seem obvious, but many homebuyers jump into things without doing much research on their local market. As well as knowing the average price for a home in your area, you need to know whether you are buying in a buyer’s or seller’s market, the average down payment in your target area, and how likely you are to pay the listing price. For instance, less than one percent of homes sell below their listing price in Canby, OR.
Be as specific as you can. Real estate values can vary widely from one neighborhood to the next, so buying a house on one block may mean a very different thing from one a few blocks over. To give you an idea of the things you should be looking out for in your new neighborhood, check out this list by Forbes.
Know Your Loan Options
Not all mortgage loans are created alike. When most people think of a loan for their home, they think of a conventional fixed-rate mortgage, probably for 30 years and with a down payment of about 20 percent. Though a good portion of loans correspond to this, you should know that there are plenty of other options, especially for first-time buyers. Here are some things you should be considering:
Mortgage length – You could save quite a bit of money by opting for a shorter option, such as a 15-year mortgage, as long as you can afford the higher monthly payments. Do check the average interest rates for the different types of mortgage to see whether it’s worth it for you.
Down payment – A 20 percent down payment is preferred by sellers (and has its advantages) but certain government-backed programs allow for down payments as low as 3 percent.
Fixed Rate vs Adjustable Rate – An adjustable rate mortgage usually has a lower starting interest rate than a fixed one, but there is a risk it will rise. Though adjustable rate mortgages (understandably) have a bad reputation, you could consider taking the risk if you could afford the potential increases. CNBC has a useful guide on the pros and cons of ARMs to help you make your decision.
Getting pre-approved for a mortgage is expected in many real estate markets, but there are still some people who do not realize this is an option. This is different from being pre-qualified, which is an informal process. Pre-approval means you are formally approved by a lender for a specific amount, which makes you seem more reliable in the eyes of the seller.
It also helps you with your search for the perfect home, since it tells you exactly what your budget is. Look for homes that are under this figure, as this will give you some leeway with things like the move and any unexpected emergencies.
Essentially, the most important thing for you to do is to do your research. Don’t assume the most common mortgage will work for you or the first lender you go to will be the one for you. This is the most important purchase in your life, so you need to be informed of your options and possibilities. Being thorough at the research step will help you avoid common home-buying mistakes and ensure that you buy the best house for you at the best price.