Are You Ready?
You’ve heard that buying a home is a smart investment, and you’ve probably heard that interest rates are low and homes are more affordable than they’ve been in three decades. You’ve always dreamed of owning your own home or maybe you’ve just begun to think about it. Maybe you’re growing a family or just want to start investing in your financial future. But how do you know if it’s the right time for YOU to buy?
What are your motivations for buying a home?
Take a moment to think about why you want to buy a home. Are you tired of putting money you won’t get back into a rental? Do you want the pride of ownership and the ability to personalize your space? Do you need more space for a growing family? Having a good understanding of the motivation behind your purchase will help keep you on the right track and ensure you make good decisions throughout the home buying process.
Do you understand where the market is today?
It’s important to do research about the real estate market in your area. Get to know average home prices as well as current home mortgage interest rates. Take a look at trends from the last several months and gain an understanding for where things are. This will help you evaluate potential homes more effectively and ensure you make a good investment. Market information can be found online, in certain trade publications and by talking to a REALTOR®.
Do you have a realistic understanding of your finances and home buying budget?
There are a number of costs that come along with home ownership besides a simple mortgage payment. These things include mortgage insurance, home owner’s insurance, closing costs, warranty expenses, on-going repair costs, Home Owners’ Association dues, property taxes, furnishing a larger space and more. It’s important to sit down and organize your budget to determine just how much you can afford to spend on your home, both monthly and annually. A good estimate is 1/3 of your total income, but everyone’s situation is different. Preparing your budget beforehand will help you resist the urge to spend more than you can actually afford just because the bank is willing to lend it to you.
Do you have money for a down payment and closing costs?
Your down payment percentage is determined by the type of home mortgage you acquire, and can range anywhere from 3.5 to 20 percent of the purchase price. Talking to a mortgage professional will help you know which types of loans you qualify for and how much of a down payment you need. Remember, the more money you put down on your home, the lower your monthly mortgage payment and the less interest you’ll pay overall.
Closing costs include taxes, title insurance, financing costs, items that must be escrowed and other settlement costs. You can expect to spend somewhere between 2 and 8 percent of the property value on closing costs, and you’ll need this up front along with your down payment. Your mortgage professional should be able to give you an estimate of your closing costs.
How is your credit?
Every potential lender will review your credit to determine your eligibility for a loan and particular interest rates. If it’s been a while since you reviewed your credit report, you’ll want to get a copy from each of the three institutions. (By law, you are able to request one free report per year per institution.) If your credit is poor, you should work on cleaning it up before you apply for a home mortgage. Make sure you make credit card and loan payments on time and that your debt-to-income ratio is fairly low. Find more suggestions on how to improve your credit at the FTC website.
For more about the home buying process, visit our Home Buying Basics page.