If you’re getting ready to buy your first home, make sure you’re really ready and aren’t buying just because it’s the adult thing to do or because interest rates are low. The first rule is to make sure you’ll be in the home you choose for the next five years. That’s how long it takes to start building equity. After that, here are four more important facts for first time home buyers to know.
Check Your Monthly Budget
Before getting attached to any home you find, make sure you can afford it first. The total monthly payment should be no more than 25 percent of your monthly income. To get that figure, multiply your monthly income by 25 percent. For example, if you bring home $5,000 per month, you can afford a maximum house payment of $1,250 based on a 15-year mortgage at 4 percent interest. This doesn’t include taxes, insurance, and HOA (homeowner’s association) fees if applicable.
Be Aware of Other Costs
Buying a home involves other costs you need to consider. It’s a good idea to have a down payment saved up, if possible, around 20 percent of the cost of the home. As a first time home buyer, you may be able to get around a down payment, but be aware that you’ll have to pay private mortgage insurance. This fee is added on to your mortgage each month to protect the lender from unforeseen losses. Other costs you’ll incur are closing costs for attorney fees, home inspection, and appraisal.
Don’t Forget Homeowners Insurance
Your new home will likely be the biggest investment you will ever make. Homeowners insurance protects you from loss from a fire or natural disaster. And if you carry a mortgage, your lender will require that either you purchase an insurance policy or they will add the cost of insurance to your monthly mortgage premium. They may charge more than what you could get on your own. Your real estate agent can help you calculate an estimate for homeowners insurance.
As you begin your home search, you may find that some real estate agents won’t show you a property without preapproval. A preapproval letter is fairly simple to get. After asking questions about your finances, a bank, mortgage company, or credit union will provide you with one. This will also help you with the first step, making sure you make a purchase you can afford.
Buying a home is a big step, but one that will pay off through return on investment if you follow the steps to do it the right way.