For many, purchasing a home will be the largest expense ever incurred. Before diving in, it is essential to organize your finances strategically to better understand your budget, home requirements, and desired area. Here is a simple but comprehensive checklist to help you move forward toward this major, life-changing purchase.
Save, save, save—Experts suggest that you have at least 20% of the home’s purchase price saved as a down payment. This may allow you to avoid paying private mortgage insurance, which is typically between 1- and 2% of the loan value (split into monthly payments). Sure, that doesn’t sound like much, but it can add thousands each year to your mortgage payments. Of course, you can purchase a home without this saved money—many people do. Having a hefty down payment will allow you to save funds in the long-run.
Pay down your existing debt—Before you start the search process, check to make sure your credit score is “good.” If you don’t have a good or great credit score, you will likely not get the best interest rate. In some cases, you may not be able to secure a loan. Focus on paying down your credit cards, outstanding bills, and student loan debt in the months and years prior to purchasing your first home. A score of 720 and above is generally considered to be “good,” and 750 to 850 is “excellent.”
Have a payment strategy—Decide ahead of time if you want to take out a fixed-rate mortgage or an adjustable-rate mortgage. Remember that, though fixed-rate mortgages are great for long-term investments, an adjustable-rate mortgage might have limits on how much the rate can rise. However, ARMs are often predatory, as mortgage brokers are often paid a higher commission on these loans than on fixed-rate mortgages. Keep this in mind as you plan your finances.
Choose the length of your home loan—Most homeowners choose a 30-year mortgage, while some opt for a 15-year or 20-year. A shorter loan will often come with a lower interest rate, but it will result in higher monthly payments. Think about how long you want to live in the house, how much money you currently make, and how many funds you have saved in the bank.
Perfect your budget—You might have a lot of money saved up, but this is a very long-term, consistent expense. See how much you can afford to spend, then account for mortgage, interest, property taxes, homeowner association fees, and utility costs. Work backwards through your numbers; set a monthly budget that you will be comfortable paying, but something that would not put you in significant trouble if you were to lose your job.