What First Time Buyers Should Consider before Taking Out a Mortgage

Posted by MoneySavvy on Jun 7th, 2010 | no comments home title

Buying your first home is a big decision. You’re balancing how much you can afford with where to live, what type of home you want to live in, taxes, insurance and of course the pending mortgage. It’s a stressful and exciting time. Before you go house hunting, it’s important to understand the ins and outs of a mortgage.

Here are six things for first time buyers to consider before taking out a mortgage:

1. What is your credit score? Your credit score will have a direct effect not only on whether you will qualify for a mortgage, but also at what interest rate. The interest rate you pay will have a direct effect on your monthly mortgage payment. It can mean the difference between a mortgage rate you can afford and one you can’t.

2. How much do you have in savings? The more you have saved, the better your interest rate and the more negotiation room you’ll have. Ideally, you’ll have 20-30% of the cost of the home for a down payment.

3. Don’t forget there will be closing costs, moving costs, taxes, home inspections and so on. It can add up.

4. How much can you really afford? Do the math, and don’t necessarily listen to the mortgage lender. Evaluate how much you can afford on a monthly basis, taking into consideration saving for retirement, emergency savings accounts, college for your kids and living expenses. Take into consideration how much you can afford and how much you want to afford. If you want to have plenty of money left over each month for discretionary spending, then cut back on your house.

5. Evaluate your mortgage options. There are many different types of mortgages, and some have a very bad reputation. Fortunately, most lenders have let go of these not so beneficial lending options and we’re back to fixed-rate mortgages. Still, there will be options. Evaluate them based on protecting your financial future. You cannot predict your future; possible events and emergencies can turn your life upside down. However, if you’ve planned well, it won’t have an effect on your home.

6. Consider getting pre-approved. Getting pre-approved for a mortgage takes some of the stress out of the process. You can enter the home search knowing you’re already approved for your mortgage and how much you can afford, and focus on finding the right home.

Also remember to look into first time home buying credits. In many cases you can get a large tax credit which will ultimately help your financial standing. Enjoy the home buying process – it’s a new adventure in your life and when you approach it wisely it can be the best decision you ever made.