You'll experience many firsts as you age that will require greater and greater responsibility on your part. Becoming an adult requires some diligence.
Financial knowledge can either generate ample opportunities or create serious obstacles that will stand in the way of some major life decisions, such as purchasing your first home.
Today's low mortgage rates may have you thinking about buying a house, which can can set you up for a happy, satisfying life — if you're well-informed and move carefully.
Punch the ticket to live comfortably all the way through to retirement by making the right decisions when the time comes to become a homeowner. Follow these three steps to avoid costly mistakes.
1. Determine how much house you can afford
Your first home is the perfect chance to take on greater financial obligations and contribute to your community. But buying a home adds to your overall expenses, and not only because of your monthly house payment.
Other common expenditures include property taxes, utility charges, homeowner association fees and mortgage closing costs.
Some of these expenses may not appear significant on their own. But as they add up, they can greatly affect the size of the home you can afford and the feasibility of the amenities you desire. These should all factor into your monthly budgeting plan.
Other costs include home upkeep, a hefty duty that requires a lot of time and can change with each season.
At the same time, maintaining a clean yard is a great way to play a part in your neighborhood. That means mowing your lawn in the summer, raking leaves in the fall, shoveling walkways in the winter and trimming hedges in the spring.
2. Know your financing options
Unless you’re purchasing your home with cash, you’re going to need a mortgage. A mortgage is a type of loan that you can use to buy or refinance a home.
You have many loan options to consider when entering the real estate market. Your credit score can tell you a lot about what may be available to you, so begin by getting a credit report before you buy a home.
Your credit report is affected by several factors, including any other outstanding loan balance that will affect your debt-to-income ratio.
Your first home loan option is an FHA loan. FHA loans are backed by the Federal Housing Administration, protecting lenders against loss from homeowners who default.
FHA loans allow for a lower down payment, but they can cost more over time because you can be required to pay a fee called private mortgage insurance (PMI).
A VA loan is another type of home loan, available only to veterans, surviving spouses or active-duty service members. A VA loan can be a great choice for those who qualify because no down payment or mortgage insurance is required, for the length of your loan term.
An option that tends to cost less than an FHA loan over time is a conventional loan. Conventional loans allow you to dodge PMI fees and potentially save hundreds of dollars if you make a down payment of 20% of your loan amount or more.
Finally, jumbo loans are mortgages in higher dollar amounts that exceed the conventional loan limits. Jumbo mortgages typically range from $484,351 to $3 million.
3. Apply for your mortgage
To obtain your home loan, work with a mortgage lender who will help you assess loan term and types, and mortgage rates.
A loan term is the amount of time you will be making payments on your mortgage. There are several choices when it comes to mortgages, ranging from a maximum long term loan of 50 years to a minimum of five-year term, depending on the lender.
The most popular mortgage loans tend to have 15- and 30-year terms. The longer your term, the lower the monthly payments, while the shorter your term, the higher your monthly payments. But the benefit to a shorter term is saving a vast amount on interest charges.
Whichever loan term you choose, you also have to decide whether you would like a fixed or adjustable rate. A fixed-rate mortgage has a steady interest rate for the entire term of the loan, while an adjustable-rate mortgage (ARM) has an interest rate that can change.
Just remember, a mortgage is a secured loan, meaning you provide collateral to protect the lender if you default on your loan. The collateral is your home.
If you are unable to make payments on your mortgage for a period of time, the lender will claim your home in a foreclosure. If you run into problems with your monthly mortgage payment down the road, it may be time to downsize or refinance as a way to better meet your needs.