Buying Your First Home

Ready to buy that first home? Not sure where to start or what all the terms mean? Start here!

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Matt Anderson's Take
Are you thinking of purchasing a house and have no idea of what is involved in the process? Well, this information may give you a better idea of what it’s all about and how to get started.

Cost & Budget

Think about how much of a mortgage you can afford each month. Is the home you plan to buy in a Home Owners Association (HOA)? If so, see what sort of monthly fees that adds to your costs. The same applies to any type of Condominium that has fees. Now look into property taxes which can add hundreds of dollars to your monthly costs.

Will you be buying with less than a 20% down payment? Then you might have to pay Private Mortgage Insurance (PMI). PMI protects the lender in case you default on the loan but can add another $100 or more to your monthly costs. It can be removed once you have 20% or more equity in the home but until then is an added cost each month.

Get Professional Help

Find a real estate agent or a Realtor in your area that can represent your interests. Using a real estate agent or Realtor is completely free to you. The seller of the house pays their commissions. They'll help find the best properties for you to look at within your budget.

As you tour properties be sure to take notes on the various things you did or didn't like. Did you notice barking dogs next door? Was the traffic unusually loud? Is it close enough to schools? High tension lines above? Noting everything you see helps making a decision easier later on.

With the owner's permission, you can also take photos of the property. These will make it easier to keep the places you saw separated in your head. Otherwise, the properties tend to blend together in your head and everything starts to look the same.

APR & Credit Score

When looking for a home loan you'll want to keep a close on on the APR and your credit score. APR stands for Annual Percentage Rate. This is generally the annualized interest rate you'll be paying on your mortgage. The lower this number is, the less you'll be paying in interest on your home loan. Tiny reductions here can mean large savings over the course of the mortgage.

Your credit score will determine how qualified your are for a home loan. The better (higher) your credit score, the more likely you are to qualify for a loan. If you've defaulted on loans before or have a lot outstanding debt then you may have a low credit score. People with low credit scores are considered a higher risk and could have a hard time qualifying for a loan. Or you may qualify but end up with a higher interest rate due to a bad credit score.

Mortgage

A mortgage is a loan from a bank or other financial institution. They, the lender, lend you a large sum of money to buy the house and you agree to pay them back. The payback period is usually 30 years. 15 year loans are also common and some may offer loans longer than 30 years.

Because you're paying over such a long period of time, the amount of interest you pay is quite large. Although 15 years loans mean a higher monthly payment than 30 year loans, sometimes the cost difference isn't as much as you might think. It's worth looking into and comparing the differences because a 15 year loan means far less in interest being paid.

For example, a $100,000 mortgage with a 4% APR means you'll pay around $172,000 over 30 years with a monthly payment of $477. That same loan over 15 years means a total payment of around $133,000 with monthly payments of $740. In this example you would own your home in half the time and pay $39,000 less.

The term to know is PITI which stands for principal, interest, taxes, and insurance. PITI is the final amount that you'll owe the lender for your home loan each month. Although you'll be making one payment, it's divided up into these four parts.

Principal
This is the amount that actually goes to paying for your home. In the early years of your loan this will portion will be small but in later years it will be the bulk of the payment.

Interest
This is the APR we discussed earlier. The fee you pay the lender because they were nice enough to loan you the money in the first place.

Taxes
In most places, owning a property means paying a property tax. The taxes are usually paid every six months. If you're home is paid off you will pay these directly. If you have a mortgage, the taxes get included in your monthly payment.

Insurance
Insurance is two things here. The first type is PMI that we mentioned at the beginning of this article. If you have less than 20% down payment then you are likely going to pay PMI. The other insurance will be home owners insurance (or possibly an HO6 policy for condo owners). Home owners insurance covers the rebuilding and/or repair of your property if things go bad. Of course, it doesn't cover all scenarios (like flooding) so read your policy carefully. Home owners insurance is included in your monthly bill so that the lender knows the place is insured.

Get Started

The path to home ownership isn't always the easiest but hopefully this article gives you some of the basic information you'll need to get started.
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