Know your credit score
If you’re in the market to buy your first home, you should know your credit score. It’s one of the most important factors when it comes to securing an attractive interest rate on a mortgage loan. Having an average credit score instead of an excellent one could be the difference between one or two percentage points on your interest rate. That could translate to hundreds of dollars of savings a month. If your credit score is lower than you’d like it to be, you can try to improve it by paying off debt. If you haven’t built up much credit, consider getting a new credit card, making your payments on time and paying your balance in full.
Determine your budget
There’s nothing worse than falling in love with a house only to realize that it doesn’t fit your budget. One way to bypass that disappointment is to set a realistic budget for yourself before you even begin browsing for houses online. Keep in mind that your monthly payment will include more than just mortgage interest and principal. Make sure you include property taxes and homeowner’s insurance in your housing budget. Once you set a realistic budget, don’t budge. Look only at houses that fit within your range to be sure you fall in love with a home that you know you can afford.
For first-time owners, homeownership comes with a number of responsibilities you may not be aware of. Whereas renters can simply call up their landlord when the toilet stops working, homeowners act as their own property managers. This means taking on home maintenance duties such as lawn care, as well as repair work like fixing broken windows or plumbing (or hiring and paying a professional to do it).
It’s easy to assume that once your home purchase is complete, you simply replace your rent check with a monthly mortgage payment. But there are other financial obligations that come with homeownership, such as annual property taxes and homeowners’ association (HOA) fees. You’ll also need to buy insurance for your home, to cover catastrophic events such as a fire or earthquake.
Depending on the market, owning a home can certainly turn into big financial gains for some. While some home values depreciate over time, in most areas of the country, home values increase at a modest rate in line with the rate of inflation. Which means it’s best to think of homeownership as a long-term investment in your family and community, and not a sure path to riches.
Volatile housing markets
Speaking of financial return, housing markets can be volatile. Before making an offer on a home, look up the history of home values in your area, as well as other demographic information that may give insights on a community’s long-term stability. County property records are public information and can often be found online, as well as through real estate sites such as Homes.com, Realtor.com or Zillow.com.
Other new home costs
The list price of a home is a big number, so it’s easy for first-time buyers to overlook other costs attached to the buying of a home. Putting a down payment on a home is fairly common knowledge, but if it’s less than 20% of the home’s value most lenders require private mortgage insurance. And once the deal has been finalized, the buyer must come up with closing costs of around 2% of the mortgage.
Other new home costs might include unexpected repairs, rooms that need renovating or new furniture and appliances that need to be added or replaced. Thus, prospective homeowners should keep several months’ worth of mortgage payments in reserve to help cover surprise expenses.
Writing off mortgage interest on your income taxes can be a nice perk to homeownership. Simply add it to your other itemized deductions, the total of which needs to exceed your standard deduction to reap the extra benefit.
To save on interest payments, it may make financial sense to choose a 15-year mortgage, or to make extra mortgage payments to pay the principle off faster. But it may be more prudent to pay off high-interest credit card balances or invest in stocks and bonds. This is why it’s always good to do the math, or consult a tax accountant, before making any big financial commitments.
Want more information? Learn more home buying tips and get in-depth information on the how much homeowners insurance costs.