Buying a home will probably be the biggest financial decision you ever make. There are so many variables, from property taxes to homeowners insurance to interest rates, it’s enough to make your head spin! Here are some home-buying tips to help you prepare, whether you’re looking for your first home or want to move to greener pastures.
Determine Your Price Range
The most important part of the process is determining how much home you can afford. You need to establish an upper limit and stick to it. Don’t let realtors seduce you into paying for more than you can afford or need. How do you determine your upper limit?
Use a Mortgage Calculator
Start by using a mortgage calculator to figure out how much your payments will be every month. Fixed-rate loans will provide stability and are the safest option. Ideally, you don’t want your monthly payment to exceed a third of your income after taxes. Consider all of your other payments and determine what you can afford to spend.
Most mortgage calculators ask you to give an estimate of your property taxes and homeowner’s insurance, as these are usually rolled into mortgage payments. Let’s look at those two items next.
Investigate Property Taxes
Property taxes are levied annually and are based on the most recent assessed value of your home. That value is usually determined by its last sale price, so when you file your records with the local government, they will know how much you spent on the home and will levy taxes accordingly.
This is quite easy to determine. Just look up the town your home is located in and search for property tax information. Local government websites will show you the latest property tax tables, which may vary depending on the value of your property. Plug this data into the mortgage calculator.
How Much Is Homeowners Insurance?
The two key variables for homeowner’s insurance are the value of your home and your location. Naturally, areas prone to natural disasters will have higher insurance rates. Likewise, the more valuable your home, the more you should expect to pay.
On average, most people pay about $100 a month for homeowner’s insurance. You may want to consider additional insurance policies for specific types of disasters. Whatever you do, don’t gloss over this step!
Calculate Closing Costs
Don’t forget about closing costs! These encompass things like real estate commissions, sales taxes, and the fees associated with mortgages and filing records with the government. Most people pay an extra 2-5% of their home price at closing.
By law, your lender should give you an estimate of these costs when you receive your mortgage approval. However, the exact numbers may change and vary from state to state.
Get the Best Interest Rate
Besides the value of the home you intend to purchase, your interest rate will have the biggest impact on your monthly payment. A loan of $100,000 at 4%, using average property tax and insurance rates, will cost you about $800 a month and just over $70,000 in interest payments over the course of 30 years.
Drop that interest down just one point to 3%, and your monthly payment goes down to $746. What’s more, your total interest paid will only be about $52,000. One percent can save you over $18,000! Needless to say, if there is one number you want to focus on, it’s the interest rate.
How can you get the lowest interest rate possible? Start by evaluating your situation and your credit score.
Review Your Credit Score
Before you begin the process of applying for a mortgage, review your credit score. You are entitled to a free report from any of the bureaus annually, and you can also use free resources like Credit Karma to keep track of your score. First, make sure there are no errors in the report. Many people have been surprised to find mistakes after applying for a loan when they could have avoided them with better preparation.
Next, see how you can lower your score. Your payment record needs to be as perfect as possible. If your record is clean, you should see which of your balances is highest. Your credit score drops significantly when a credit card is close to its limit or a brand new car loan is on the books. This is known as credit utilization.
Don’t rush to close accounts you don’t use. Accounts with a long history of good behavior are good for your score. Instead, focus on paying down high-interest credit cards or retailer credit accounts.
When you get an offer from one lender, take it to another and ask them to beat it. People often avoid applying for many mortgages due to the fact that multiple requests can lower your credit score. However, when you make these requests in a short period of time, bureaus usually treat them as a single action. So don’t be afraid to force banks to compete for your business.
Consider Alternative Loans
Veterans’ Affairs Loans, or VA loans, can be great alternatives to regular mortgages. Government-sponsored lenders such as Fannie Mae and Freddie Mac can also provide low-interest loans in some cases. If you’re a member of a local credit union, give them a call too!
However, beware of tantalizing variable-rate mortgages. These can shift rates abruptly and cause your monthly payments to spike.
Buying Your First Home?
If you’re making your first home purchase, we have another important tip for you: Talk to people. Don’t do it alone! That is how you end up making mistakes. If your parents are homeowners, ask them about the process. If your friends or coworkers have bought a home recently, talk to them about their experience.
Read articles, watch videos online, and look for ways to enrich your knowledge of the process. This way you can avoid scams and get the best deal possible. New homeowners are easy targets for predatory lenders, shady homeowners, and sketchy real estate agents. The more you know, the better it’ll go.