FINANCES: tips for first time homebuyers
Fear not first-time financers. We’ve got you covered. Here’s everything you need to know to sound and think like a pro.
First things first – start working with a lender
Before purchasing or remodeling, it’s critical to establish a budget. “Working with a lender from the beginning will help to determine if you qualify for a mortgage, how much you qualify for and which loan will work best for your specific needs,” said Tami Randolph with FirstCapital Bank of Texas. Mortgages typically consist of a principle amount (cost of the home) plus an interest amount, which is spread over a set number of years. A 30 year pay-back period is most common.
Cost of Financing Your Home
Think of interest rates as the cost of a loan. One of the biggest factors in financing a remodel, new construction or home purchase is the cost of financing. Remodeling an existing home can be funded from savings or through a home equity line of credit, with the latter utilizing your home’s value as “collateral” security for the bank. Regardless of whether you’re looking for a mortgage or home equity line of credit, your credit score, the terms of the loan (fixed rate vs adjustable rate) and current interest rates are all factors to consider. And just because you qualify for a larger loan amount doesn’t mean it’s affordable for you. Realistically assess your budget requirements first.
The average down payment was 11% in 2016, according to the National Association of Realtors. While some prefer to put down as much as 20%, the VA and USDA home loan programs actually require no down payment at all.
Types of Loans
Randolph recommends asking your lender about the many first-time homebuyer programs that are available such as these popular options.
- If you served in the military, consider a Veterans Administration loan which allows for 100% of the home purchase to be financed for any primary residence.
- The USDA Rural Housing loan offers 100% financing, if qualifications are met.
- Federal Housing Administration “FHA” loans are also popular with a down payment option of 3.5%, depending on the loan cap amount per county.
- Conventional home loans are not insured by the federal government but do have advantages. With a qualifying credit score and ability to put 20% down, you would not be required to pay private mortgage insurance. Conventional loans come with either fixed rates or adjustable rates. Adjustable rates may be attractively low in the beginning but can fluctuate and spike after several years, making budgeting more difficult.
When you close on a home, be prepared to pay the down payment as well as closing costs, prepaid taxes and insurance fees. There is the option of negotiating with the seller to cover some of those costs. Keep in mind each loan program has limits.
Taxes, Homeowners Insurance & POA Dues
Property taxes are assessed by county, and school taxes are assigned by school district. These are generally a percentage of your tax role value. These may vary widely depending on the area, so do your homework first before spending time and energy looking for homes with tax requirements out of your budget range. Annual property and school taxes are required to be included in the monthly payment on loan programs with less than 20% down. The Homeowners Insurance premium is first negotiated by you with your insurance agent. Then the lender will include your insurance expenses in loan documents and monthly payments.
And before remodeling, first consider that a home in a community with high property tax values can significantly increase in value and taxes after the remodel. Remember to also inquire about property owners association’s dues. Payments may be annual, quarterly or monthly and either voluntary or mandatory. Some POA’s can charge thousands of dollars per month, so be sure ask.
Don’t forget to account for typical expenses such as monthly utilities (water, gas, trash, electric) and home maintenance (yard and pool upkeep). It’s also a good idea to keep a small maintenance fund for those unexpected repair costs.