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SALT LAKE CITY — Until you have done it, knowing the ins and outs of buying a home can be challenging. What is the difference between a fixed- and adjustable-rate mortgage? How do you know how much you'll need for a down payment? And where can you find reliable answers to these questions? In order to make the best investment, you have to have as much information as possible. So, instead of trying to learn during the process, check out these five concepts you should understand prior to buying your first home.
- Your capacity A mortgage is a serious investment requiring thoughtful planning. Before considering purchasing a home, make sure you understand your paying capacity. Mortgage lenders have many tools at their disposal to help assess an appropriate mortgage payment range for you, but it is important you have also thought through all your financial resources and your monthly, quarterly and annual expenses. It is critical to ensure you can pay the mortgage on time each month without disrupting your finances and quality of life.
- Extra costs When considering your payment capacity, it is important to budget for some of the upfront costs when purchasing a home. In addition to the cost of your home, there are fees associated with closing the loan, aptly named: closing costs. These can often be rolled into the cost of the loan, but make sure to ask your mortgage professional in advance so you can accurately anticipate the cost. It is also important to have a budget for any immediate repairs and appliances you may need to pay for prior to moving in. Will you need to purchase a refrigerator? Washer and dryer? These are additional expenses to keep in consideration as you plan your purchase. It is also very important, when budgeting, to consider the additional costs of home maintenance that you might not have paid for while renting. An incidentals fund for unexpected maintenance, medical emergencies, job losses, etc., can help ensure you will be able to pay your mortgage even during times of hardship.
- Your credit Your credit score is a way for lenders to understand how big of a risk you are to them should they decide to loan you money. A high credit score communicates to lenders that you have successfully managed your debt by making reliable payments overtime, and that you do not have exceeding amounts of debt in relation to your income. With a high credit score, you are perceived as more likely to repay the lender in the time outlined by the mortgage note and therefore their risk is lower. Credit scores range from 300 to 850 and knowing where you stand is paramount. However, it is useful to know that accessing your credit score too often can actually lower your credit score. So, if you're planning on buying your first home, check your credit at least several months prior to trying to qualify for a loan. That way, you will have a chance to address any issues that might be lowering your credit score, and it allows for time between when you check it and your lender checks it.
Typically, with down payments of 20 percent or more, you can avoid mortgage insurance all together.
- Down payment A down payment is the portion of your home that you pay at the time of purchase, and they are typically calculated as a percentage of the total cost of the home. Here, you will want to anticipate at least three to five percent for a down payment. The larger you can make your down payment, the less you will have to pay in mortgage insurance which will, in turn, reduce your overall cost of borrowing. Typically, with down payments of 20 percent or more, you can avoid mortgage insurance all together.
- Your team This is the most important recommendation. Having a foundational understanding is necessary for all homebuyers, but that should always be coupled by a professional with expertise who understands the market in which you are buying and the laws and regulations for home purchasing. Ask your friends and family for recommended Realtors and mortgage professionals to make sure you find someone you can trust throughout your experience. Homeownership is one of life's greatest pleasures and accomplishments. It is truly part of the American Dream. But, being able to purchase wisely and safely is the only way to do it. So be informed and happy buying! Dave Zitting is a ksl.com business insider and the President and Chief Executive Officer of Primary Residential Mortgage, Inc.
