Buying a home is a big decision, and when it comes time to look seriously at your first home purchase, there are several considerations to make. Is owning truly better than renting? What are some pitfalls to avoid? How should mortgage options be navigated? As daunting as buying a home may seem, these guidelines can help first-time homebuyers get through the mortgage process easily.
To rent or to buy?
As a first-time home buyer, you may currently be renting and wondering what is best for your financial situation. To make the decision even harder, you often hear renting a home is a waste of money or buying a home is a bad investment. There are pros and cons to each, and it’s important to ask which one would benefit your situation most before deciding. Whether you’re single or live with family, you’ll want to make sure home life is comfy.
Before you decide, ask yourself these questions.
1. What can I afford? On top of monthly mortgage payments, buying a house will entail a down payment, closing costs and other fees. You may need to adjust your financial priorities and decrease daily expenses if you want to own a home. Assess your financial goals and make sure your budget is in line.
2. How long do you plan to live here? This projection will help determine if renting is a better option. You may be single and often on the move from city to city; buying a house could anchor you down financially. On the other hand, you may like your city, have a steady job and see yourself here for years. Buying could be more cost-effective.
3. What about property taxes? When renting, you don’t have to pay property taxes, and renters’ insurance costs a lot less than homeowner’s insurance. When you buy a house, in most cases, along with homeowner’s insurance, property taxes are lumped into your monthly payment. This could increase your monthly payment significantly. You will, however, be able to write off your property taxes when filing your income taxes. Find out what rates are in your location with this property tax calculator.
4. Can I handle the risks of owning a home? This is a big investment. Are you comfortable with potential financial sufferings? Utility repairs that you will now be responsible for? The possibility of unemployment? These are things you need to consider before signing off on anything.
5. What do you prefer? Are you the type of person who likes to be in control? Do you favor privacy and freedom of choice that go along with owning a home? Or maybe you like the short-term renting commitment and convenience of maintenance coming to fix broken appliances.
Mistakes to avoid
First-time homebuyers should watch out for the following pitfalls.
1. Looking for a home before applying for a mortgage. Unless you plan to pay with cash, the mortgage application is really the first step to complete. Once you’re preapproved for a home loan, searching for a home becomes easier. Sellers will take offers a little more seriously as your finances have been reviewed and you have a preapproved amount that’s been underwritten.
2. Buying more than you can afford. Home prices are at a record high today, and moving outside of your budget may put you in a difficult position down the road. Focus on what monthly amount you can afford instead of the amount you were approved for.
3. Ignoring hidden homeownership costs. Aside from the monthly principal and interest amount, you’ll need to account for property taxes, mortgage insurance and other maintenance costs, such as appliance repairs.
4. Making emotional decisions. Once you have a budget for what you can afford, stick to it. It’s important to avoid becoming emotionally attached to a home that could put you in a rough spot, financially, down the road.
5. Meeting with only one mortgage lender. Shop around with different lenders for more than one rate quote. Compare the rates, fees and terms to ensure the best deal for your financial situation. Another consideration is the customer service a mortgage lender provides. You’ll want someone who is responsive and takes you through the process step by step.
Types of mortgages
First time homebuyers should know about three types of mortgages.
Fixed-rate mortgages are a type of mortgage loan where the interest rate remains constant over the life of the loan. Thirty-year mortgages are the most common, but you may also choose a 20-year, 15-year, and even 10-year fixed-rate mortgage. Though the rates tend to be higher for fixed-rate mortgages than for other loan types, your payment won’t change. This stability makes fixed-rate the most secure type of mortgage for buyers.
Adjustable-rate mortgages (ARMs) have a period of fixed interest, but after that, the payment changes with whatever index the loan is based on. The period of fixed interest may be three, five, or seven years. With a 5/1 ARM (the first number stands for the number of years in the initial fixed period, while the second indicates how often the new rate will adjust), for example, the initial interest rate remains fixed for the first five years, and then adjusts annually for the remaining term.
While ARMs are less secure than fixed-rate mortgages, they tend to have lower initial rates and therefore lower monthly payments. They can be a good option if money is tight in the early years or if you know you won’t be living in the house for too long, as long as you are confident you can meet future interest and payment increases.
Interest-only mortgages allow you to pay just interest for between three and 10 years. Once that period is over, the payment rises to include both principal and interest. While qualification can be easier and the monthly costs can be lower than other mortgage types, these mortgages can be risky. A downturn in housing prices could mean you end up owing more than you own, and an interest rate hike could put the payments beyond your reach.
The decision to buy a house or rent is one of the biggest considerations you’ll make in your life, and an important one at that. Make sure all your Ts are crossed and you have a good sense of budgeting.
If you ever need advice or are looking to take the first steps on buying a home, visit u1cu.org/mortgage or give us a call at (800) 762-9555 ext. 424.
Universal 1 Credit Union (U1) is a not-for-profit financial institution that exists to create personal, community and financial well-being. With over 50,000 members and more than 85 years of service, U1 has been serving members in the Dayton, Ohio, area since 1937.