With interest rates at all-time lows and home prices equally attractive, now is a great time for well-qualified first time homebuyers to get into the market. To sweeten the pot, new homebuyers can now enjoy a tax credit of up to $8,000 thanks to the American Recovery and Reinvestment Act.
However, buying a home isn’t a simple transaction. Unless you have substantial savings and are buying with cash, you’ll need to get a mortgage. Securing a mortgage can be complicated and full of additional costs and pitfalls. Here are some tips first timers can use to navigate the process:
1. Don’t apply for more than you can afford
One of the biggest mistakes new homebuyers make is buying a house that’s costs too much. Just because you can get approved for a certain amount by a bank doesn’t mean that’s how much you should spend. Before you even go shopping for a home, sit down with your budget. Use a mortgage calculator like this one from BankingMyWay.com to figure how much you can afford. Your total home costs should not exceed 31% of your gross income.
2. Comparison shop for mortgages
Rates can vary greatly depending on which lender you choose. Pay close attention to fees when shopping for loans. Rather than comparing annual percentage rates (APRs), look at annual percentage yields (APYs). The APYs factor in the cost of the loan to make comparing mortgages easier. Also, make sure to ask if there are special programs for first-time buyers. You may be able to get a lower down payment requirement or better terms. Shop for mortgage offers in your area using the Mortgage Rate Search tool from BankingMyWay.com.
3. Negotiate on closing costs
First time homebuyers often don’t have a lot of upfront cash. One way to stretch out the cash you do have is to negotiate with the seller to pay your closing costs. This is a common tactic in a buyer’s market, which this definitely is. In the past, sellers could also contribute to a buyer’s down payment, but rules have changed to prevent this. Now, a seller’s maximum contribution is equal to the total amount of the closing costs. Alternatively, you can negotiate down closing costs with your lender. Many of the items included in closing cost calculations are unnecessary and can be eliminated or reduced if you request it.
4. Don’t overlook additional costs associated with your loan
In addition to your principal and interest payments, you may also have to pay mortgage insurance, homeowner’s insurance and property taxes to escrow in your monthly payment. If you put less than 20% of the purchase price on the home down, you will have to pay private mortgage insurance, also known as PMI (the FHA charges its own type of mortgage insurance that also requires an upfront premium). The annual premium on PMI is usually equal to 0.5% of the loan amount and payments are made on a monthly basis. According to the Insurance Information Institute, the average annual premium for homeowner’s insurance is $481, but costs vary. Finally, your property taxes depend on your local tax rate, but are usually around 1.5 percent of your purchase price. Your monthly payments are held in escrow until your tax bill has to be paid.
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