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Homeownership is among the most money-intensive undertakings most Americans make. Also, it’s a journey that takes a considerably long period, with typical mortgage loans having repayment periods of between 15 to 30 years.
Being such a long-term investment, you must ensure that you get your math right before and after committing to home buying. If you are on a journey to become a homebuyer for the first time but are unsure if you are taking the right steps, this guide offers tips on what to consider when buying your first home to ensure you do not get into a financial mess.
Get Your Budget Right
The most common mistake first-time home buyers make is going for the home they want rather than a home they can afford. If your home is way over what you can afford, the lending company will likely not approve your loan. But even when a lender could approve your loan, it’s essential to evaluate if a large mortgage is what you need at the moment.
So start with making a budget. The first step in creating a budget is looking at your annual income. Then consider your annual installments alongside other obligations such as savings, debts, and costs that come with home ownership, such as home insurance, property tax, bills, and maintenance costs.
If, after deducting the expenses, you are left with close to nothing, that mortgage is too expensive, and you should consider a cheaper option. Ideally, housing costs should not exceed 30% of your income, mortgage repayments included.
If you are unsure what mortgage option suits you, this first-time home buyer’s guide by Sofi for help making the right decisions.
Save For a Down Payment
Most lenders require borrowers to make a down payment when applying for a mortgage. The payable down payment percentage depends on the type of mortgage and the lender. One lender can ask for a deposit of as low as 3% of the home’s value, while others can ask for as high as 20%.
While you may want to choose the option with the least down payments, saving for a down payment is the better option. The reasoning behind this is simple; paying a larger down payment reduces your mortgage’s overall size, which could mean more manageable installments. Also, a higher down payment can see you get better rates.
If you go for a down payment of less than 20%, the lender may require you to carry private mortgage insurance (PMI). So, paying 20% or higher as a down payment can translate into significant savings. Lastly, having a large down payment gives you more equity in your home which can work in your favor should you need to sell your home.
Readjust Your Budget
Budgeting before deciding to buy a home is essential. However, even the best budget doesn’t always align with reality, so it’s important to readjust your budget after securing a mortgage.
With your mortgage deducting a substantial chunk from your account, your financial situation will likely change, and you could feel a little under pressure. This is where readjusting your budget comes in. For example, you decide to cut on expenses that are not absolute necessities, like scaling back on the number of streaming service providers you subscribe to.
Also, avoid money-intensive investments at all costs unless they are absolute necessities. For example, you could hold off buying a new car until you stabilize your financial situation.
It is possible to get into a mortgage situation but feel the need to back down midway into your loan servicing. While you may not have the option of defaulting your payments, as this could mean losing your home, you could seek to refinance your mortgage.
Refinancing means taking a new mortgage to pay off an older one. Doing this is particularly beneficial if you get an option that offers better terms than your existing mortgage, all fees considered.
Another good reason to refinance your mortgage is if you have multiple debts you want to consolidate. If you have considered mortgage refinancing but are unsure if it’s the best action, consider talking to a financial professional.
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