Financial Cosiderations Before Buying Your First Home
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Many Americans still believe that owning a home represents the American dream. The extremely low home mortgage interest rate and an abundance of available homes in the market are making many people realize their dreams. However, before you take the jump to buy your first home, you need to prepare yourself to avoid any unexpected hurdles that may put you in a financial jeopardy.
First, you need to obtain a credit report from all the three credit bureaus. The three credit bureaus are: Experian, Equifax, and TransUnion. By law, you’re entitled to a copy of your credit report from each of the credit bureaus once a year for free.
Go to www.annualcreditreport.com to get your credit report for free. Don’t go to FreeCreditReport.com. They are a paid service provider and they will try to enroll you in various services that you really don’t need. Once enrolled in their services, they will start charging your credit card every month.
Once you obtain your free credit reports from annual credit report site, check all the three reports to find if there is any mistakes. If you spot a mistake, you need to correct it immediately. Contact the credit bureaus by writing and explain what is wrong in your credit report. Follow it up to make sure that mistakes are removed immediately.
If you carry any credit card balance, pay it off before purchasing a home. This will help you improve your FICA score and reduce your mortgage interest rate. Don’t think about buying a home if you’re struggling with your credit card bills.
You need to know all those cryptic mortgage terms like APR, balloon payment, etc. Go to moving.com and search for mortgage glossary. They have an excellent list of all the mortgage terms that will help you understand the mortgage process.
Shop around to find the best mortgage rate. If you belong to a credit union, check their rates. Most credit union rates are very competitive and they provide excellent value to their members.
If you pay 20% down payment, you will avoid mortgage insurance which can be as high as $100 a month for $150,000 loan. If you have the cash, go for 20% down payment, instead of paying points to lower your interest rate.
Don’t take a 20 years mortgage. The interest rates for 20 years and 30 years mortgages are the same. Take the 30 years mortgage and if you can afford, pay an extra payment every year to reduce the number of years.
Estimate your monthly payment using a mortgage calculator found at many banks’ web sites. You can also use the one found at bankrate.com. Call your county office or use zillow.com to estimate your yearly property tax.
Add an estimated monthly property tax to your monthly mortgage payment. On top of that, add another $50-$100 per month for your home insurance. Your total monthly payment is your mortgage payment, plus property tax, plus home insurance fee.
Your total monthly payment should not be more that 30% of your take home pay. Using this simple rule of the thumb, you can estimate how much money you can afford to pay for your home.
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