Questions to Ask Yourself Before You Buy Your First Home
Thinking about buying your first home? Here are four questions to ask yourself beforehand to ensure that you don’t go broke in the process.
Have you spoken with a reputable lender?
Initiating a conversation with a lender will you show you much buying power you have and will give you an estimate of your monthly mortgage and escrow payment. An escrow payment is a payment pulled monthly and set aside by your lender to pay your property taxes and home owners insurance policy.
How long do you plan to live in this home?
If you need to move in the first year or two you could owe money at closing. On average it takes four years to start earning equity. (especially if you put less than 20% down) If this not a home you plan to be in for more than three years you may want to talk to your lender about an ARM (Adjustable Rate Mortgage). These loans lock you in at a rate considerably lower than a 30 year fixed rate, but they can increase after the term. Ie: 5 year ARM, 7 year ARM or 10 year ARM.
This is still a 30 year amortization, just not a fixed rate. There are several loan options and a reputable lender will educate you on each one and find a loan that best serves you. The most common are conventional, Federal Housing Administration Loans (FHA), Veterans Affairs Loans (VA) and the Adjustable Rate mentioned above.
Do you have money to put down?
How much should you put down? Some lenders offer conventional loans with as little as 3% to 5% down, but make sure that you know that you will pay an additional insurance called PMI (Private Mortgage Insurance). You must put 20% down to avoid this payment. If you put down less than 20% and need to sell in the first couple of years chances are you will have to pay that at closing to sell your home to avoid a short sale.
After your down payment, will you have cash in reserves?
Weather you rent or buy, you are paying someone’s mortgage. Either yours, or your landlords. If it’s feasible, I highly recommend your hard earned money go towards your own mortgage unless that purchase puts you in a “house poor” situation. It is best to have cash reserves set aside to handle any unforeseen repairs or expenses that often arise with home ownership. If your proceed towards home ownership in a house poor situation you stand a greater risk of being upside down in your investment and could cause harm to your credit score for future purchases.