Becoming a homeowner is a big part of the American dream, but buying a home is one of the biggest financial decisions that you’ll ever make in your life. Before you start the process of locating your dream home and applying for a mortgage, there are some questions you’ll want to ask to ensure that you’re making the best decision.
Here are 5 things to consider before stepping into the world of homeownership.
1. Am I Ready Financially?
With people in your inner circle buying homes, it can be tempting to join the crowd, but, before buying a home, you’ll want to have an honest conversation with yourself. Are you financially stable enough to own a home? Buying a home is only one part of the process.
Once you own a home, you’ll need to have access to funds so that you can pay for household items and any emergencies that may arise. HVAC systems break and appliances stop working, so it’s important that you have the necessary income to pay your mortgage while also accounting for unexpected fees.
You’ll also want to think about financing home improvement. This is especially improvement for buyers who aren’t purchasing a brand new home. Chances are the home you’re buying could use some improvement. If you’re looking to make early changes, you’ll need to have the money to pay for home improvement costs.
2. Is My Credit Healthy?
Your credit score will play a huge part in whether or not you’re approved for a mortgage loan. It will also play a role in the interest rate that you’re approved for. As with any other type of loan, the higher your credit score, the lower your interest rate will be. With a mortgage, you’ll be paying that interest rate for at least 15 years, so you want to get the lowest rate possible.
Before applying for a loan, look at your credit history and credit score. Aim to be at least in the 700s to get a reasonable interest rate. If your credit could use a boost, pay off debt, make on-time payments, and avoid applying for more credit.
3. What’s My Budget?
With so many beautiful homes on the market, it’s easy to get sucked into looking at homes before ever considering your budget. For many, the price tag seems affordable, but that’s before other fees are added to the equation. Your budget is what will ultimately drive the decision behind the house that you purchase. Falling in love with a home outside of your price range will only make things harder for you.
Before looking at homes, take the time to estimate your monthly mortgage payments. There are all sorts of online calculators that you can use to get a base mortgage payment. This includes the cost of the house, loan interest, and closing costs. From there you can add in other costs such as appliances, window treatments, and other expenses.
4. What Mortgage Option Is Best?
A mortgage isn’t just a mortgage. You’ll want to take the time to research all of the options available to you so that you can make the best financial decision. Remember, buying a home is a decision that will impact you for decades, so you want to make the right loan decision.
There are all sorts of options when it comes to funding the purchase of a home including:
15 year mortgages
30 year mortgages
Fixed rate mortgages
5/1 ARM mortgages
While having options makes home buying much more versatile for prospective home buyers of all types, it can also make the process a little more confusing. Before deciding to purchase a home, you’ll want to take the time to determine which mortgage loan is best for you. For military members and veterans, a VA loan is an obvious choice, but what about for those who don’t have money for closing costs or buyers who want to pay less interest?
Take the time to research all of the mortgage loan options. From there you can best determine what type of mortgage best fits your financial situation.
5. Can I Afford Closing Costs?
Many prospective home buyers only think about the monthly cost of their mortgage, but, closing costs must also be considered. These are the costs that are due at signing and include agent commissions, title insurance, inspection costs, and more. Most closing costs are around 5% of the total cost of your home which often means thousands of dollars!
If you’re lucky, sometimes the seller will pay closing costs, but, if you’re on the hook for them, you’ll need to ensure that you can afford them. This means saving money before purchasing a home or finding a loan that allows you to wrap closing costs into the loan. Be aware that this option means paying interest on those costs which inevitably means more money out of your pocket.
Taking the plunge and buying a home is an exciting yet scary venture. Be sure you’ve made important considerations and answered critical questions before signing the paperwork and becoming a homeowner.
How did you end up taking the leap into home ownership? Do you have any tips for securing a home in today’s market? Share your tips in the comments below.