If you’re looking to buy a house, learn about the programs, mortgage options, and total cost of home ownership.
Buying a house is usually the biggest purchase you’ll make. Not only is it an investment, but it’s also where you live, and buying the right place can bring both financial and emotional rewards. If you’re a first-time homebuyer, going in with some knowledge of the local housing market and understanding the total cost of ownership can be a big help.
First things first. Are you ready to buy, or is renting a better alternative, at least for now? Although many still view owning a home as a core of the “American dream,” a growing number of people have opted to keep renting, even after becoming financially able to buy a home.
There are a number of factors that go into the rent-or-buy decision. For example, the choice may depend on whether you value flexibility—the ability to relocate or trade up (or down) on your housing choice—or stability, and are ready to plant long-term roots.
So you’re ready to move forward with buying a home? Start by doing some basic Internet research. Read about existing and new-home sales data for broader home trends, and get a clear sense of the local housing market by looking at realtor websites.
Holden Lewis, senior mortgage analyst for Bankrate.com, and J. Michael Black, senior mortgage consultant for Wintrust, say working with a real estate professional who specializes in your desired area is the best way to understand the economic factors affecting local housing.
Fannie Mae, Freddie Mac, and the Federal Housing Administration offer programs that can keep down payments as low as 3%, but Black says homebuyers who put down 10% can get more attractive financing options.
Lewis adds, “Many states and some municipalities have housing finance agencies that can assist with down payments, so ask your mortgage lender about these programs.”
According to Black, anything less than 20% down means homebuyers will need to get private mortgage insurance, also known as PMI, which protects the lender in case a home goes into foreclosure. He says it will add to the cost of the loan, but when the home’s value exceeds 78% of the original purchase price, it can be cancelled.
Mortgage financing options are generally either fixed rate, where the interest rate is set over the life of the loan, or adjustable, where the loan’s interest rate may change after a certain number of years. Which one is appropriate depends on how long you expect to live in the place.
Most first-time homebuyers usually stay put for five to seven years. Black said getting an adjustable-rate mortgage can be a good option in that case, as they usually have lower interest rates—at least at first. For those planning to live in their home longer, fixed rates are probably the way to go.
The total cost of ownership (TCO) for a home doesn’t just include the principal and interest payments, Lewis said; there are also closing costs, property taxes, insurance, maintenance, homeowner assessment fees, and other costs to consider.
Closing costs can vary based on origination fees, lender charges, and other factors, but some experts suggest using 3% of the purchase price as an approximation.
Lewis added that buyers should save 1% of the home’s value annually to pay for maintenance and repairs as part of ongoing homeownership.
“I’m not saying you’ll spend that amount every year. A lot of times you’ll pay less than that. Some years you’ll pay several years of that,” he said.
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