Adjustable-rate mortgage? Closing costs? Appraisal? Homeowners insurance? Prequalification?
That’s a lot of fancy words! Let’s break down what these mean and walkthrough the home buying process from start to finish. If you’re a first time home buyer and would like to learn everything about buying a home, keep reading!
If you’re a visual learner, watch our free webinar on Home Buying Basics.
Purchasing a house is a big life decision. With so many factors to consider, it’s very important to not rush through this process. A house is a large investment, so you’ll need to make smart and financially sound decisions so that you know what you’re agreeing to.
Can I afford to buy a house?
If you aren’t financially stable right now, it’s probably not a great time to consider purchasing a house. Even if the home buying market is in great shape or rates are at historic lows, it still might not be a financially wise decision for yourself. We recommend doing an audit on your personal finances to determine your overall financial health and ensure that you’re prepared for both the purchase of a house and the ongoing maintenance expenses involved. Sometimes it’s better to build up your savings to put yourself in a better position down the road. Only buy a home if you’re ready, not because you feel pressured to.
What is my budget?
With that said, the first step of the home buying process is to estimate a budget. This can sound intimidating, but it will help you determine which kind of house you can afford and allow you to set realistic expectations for your home search. Navigating a home search isn’t always the easiest, so we have a handy Home Affordability Calculator to help you determine how much you can afford.
Let’s quickly breakdown some mortgage terms:
- Loan Term: this is simply the amount of time you have to pay back the loan, in years.
- Principal: the original amount of money you borrow for your home loan, before interest accrues.
- Interest Rate: known as Annual Percentage Rate (APR), this is the amount you pay in order to borrow the principal. In other words, it’s the extra cost beyond the principal amount in exchange for borrowing money for your loan.
- Down Payment: the initial up-front payment you make on your home.
- Insurance: This includes Homeowners insurance and Private Mortgage Insurance (PMI). You’re required to get homeowners insurance in case your house needs to be rebuilt, but you only need to pay for PMI up until a certain point (this protects the lender in case you stop making mortgage payments).
Keep in mind that the bigger the house, the more upfront costs you will owe. Upfront costs could include a down payment, closing costs, and inspections. Use our Home Savings Calculator to help determine upfront costs.
Where do I want to live?
This is the fun part! You get to create a list of important characteristics you’d like in your new home. Think about which type of home will best suit your needs – whether that’s a traditional house, a duplex, condo – each have their own pros and cons. But it’s not just about the home, it’s also about the neighborhood. Consider schools, the commute to work, and other things that are important to you. We suggest creating a list of wants vs. needs to help weigh which factors are the most important to you. Your realtor will help guide you through the house hunting process while taking into consideration your ideal home! You can also search for listings online, drive around your desired neighborhoods in search of houses on the market, and reach out to friends and family for leads.
Do you want to move in sooner? Before you set foot into your first open house, make sure to come prepared with a preapproval letter. This will give you an edge in contract negotiations and can help speed up the closing process. Get in touch with one of our loan counselors to figure out how!
I found my dream home! How do I buy it?
You’re one step closer to sealing the deal! Now you’ll need to take out a home loan. Just as every home is different, every home loan is different. It’s important to find the one that fits you and your goals, taking into consideration any upcoming short-term expenses and your long-term budget. For example, if you plan on getting married within the next year, a longer loan term might be a better option to meet your circumstances.
Here’s some of the most common types of home loans:
- Thirty-Year Fixed Rate Mortgage: a conventional 30-year fixed rate mortgage will have a constant (or “locked in”) interest rate and monthly payments that will never change. If you plan to stay in your home for more than 7 years this is a good choice. Longer-term loans like this may have lower monthly payments, typically higher interest rates, and a higher overall total cost.
- Fifteen-Year Fixed Rate Mortgage: a traditional 15-year fixed rate mortgage features a constant interest rate and monthly payments. Because this loan is issued over a 15-year span, it gives you an opportunity to pay off your home faster if you’re able to commit to higher monthly payments. Short-term loans like this typically have lower interest rates and an overall lower total cost.
- Adjustable Rate Mortgage (ARM): most commonly in 1, 5, or 7-year periods, ARMs include a fixed payment for set amount of time. After that period of time, the interest rate and monthly payments will fluctuate from time-to-time. When you apply for an ARM, you’ll be told how, when, and why the rates may change. Typically offering lower interest rates, this is a good choice for those who expect to move or refinance shortly after the adjustment occurs.
We encourage you to shop around for a lender with the best rate and choose a loan that best aligns with your financial goals. Compare multiple loan estimates simultaneously with our Mortgage Comparison Calculator.
How do I prepare to close on my house?
Almost there! Before getting the keys to your new home there’s a final series of steps to complete. Once you’ve chosen your house, you’ll need to do all the necessary inspections. Even if the house appears in great condition, there could be underlying repairs or defects that a trained professional will identify before you officially sign on the home. If the inspection doesn’t reveal any substantial problems, you should be prepared to negotiate on the selling price. Negotiation occurs between the seller and buyer and can either decrease or increase the final purchase price of the home.
Important documents to pay close attention to are the Loan Estimate and Closing Disclosure to ensure you know what you’re applying for. In addition, mortgage companies often require a home appraisal which is an estimate that determines the value of the home. An appraisal ensures the home is worth its purchase price and prevents you from paying more than the house is actually worth. This also protects the lender from giving you more money than the cost of the home.
Signing on the dotted line includes finalizing the settlement, switching over utilities in your name, and getting your keys.
You’ve sealed the deal! Congratulations, you’re officially a homeowner.
Owning a home isn’t always straightforward, and it’s okay not to know all the answers. If you have any questions along the way, we’ve got you covered. Alltru is always here to help.
Contact our mortgage specialists and we’ll help talk through your options and make the home buying process as stress-free and easy as possible.