The American dream of owning a home can come true for you. Buying a home is the most expensive decision you’ll ever make. It’s also an emotional and stressful experience. There’s a lot of information you have to absorb to make wise house buying and financing decisions. Avoid Becoming House Poor
You don’t want to end up in a situation where you have such high house payments that you can’t afford much of anything else. You may think buying your dream house is worth any sacrifice, but years of doing without the enjoyment of vacations, eating out, decorating or other simple pleasures can make your dream house fell like a jail. A good rule of thumb is to buy a house that costs less than two and a half times your income. If your income is $50,000 a year, try to keep your home price under $125,000.
Negotiating the Offer
Once you've found the house you want to buy, the next step is to make an offer, which is a legally binding contract.
The offer will be in writing and include the amount you're willing to pay for the house and the time frame for the purchase. It should be contingent on a satisfactory house inspection and bank approval. If you use a real estate agent, the agent will pass along your initial offer to the seller.
You'll pay earnest money, usually $1,000, which will be credited to the sales price if the sale goes through. The sellers may accept or decline your offer or they may make a counteroffer. If you come to an agreement, the buyer will accept your final written offer and the home inspections will take place as quickly as possible.
The Down Payment & Closing Costs
A down payment is the amount of money you pay up-front when you buy property, and it reduces the amount of money you need to borrow. The larger the down payment, the smaller your loan and monthly payments will be, but it’s difficult to save enough for a sizeable down payment and closing costs that require cash.
There are several options for coming up with more cash. One is to go on a cash budget for a few months by cutting your spending to the bare minimum and saving as much as possible. Another method is to sock away all the extra money that comes you way: income tax refunds, overtime, bonuses, and cash gifts. You may have a relative who’s willing to lend you money, but it’s not legal to borrow money for your down payments unless you identify the loan as a debt and can still qualify. Otherwise your lender will require a statement that the money is a gift. If your selling a house, use any equity you have in it to apply to the down payment on the new house.
Closing costs include real-estate transfer taxes, escrows for property taxes and insurance, title insurance, attorney fees, loan origination fees, and so on. Closing costs vary by location but are typically 3 to 6 percent of your loan. Like the down payment, closing costs must be paid at the time of purchase. Federal law requires lenders to provide you with a Good Faith Estimate of your closing costs before you go to settlement.
Shopping for a Mortgage
Don't underestimate the impact of interest rates on your monthly payments. A $100,000 loan at 7 percent interest for thirty years would cost $665 per month. The same loan at 8 percent interest would cost $734 per month, a difference of $69 per month, or $24,840 over the life of a thirty-year mortgage.
If you can swing the payments comfortably, the shorter term mortgages are the best choice. Payments on fifteen and twenty-year loans are somewhat higher than those on traditional thiry-year loans, so it requires a higher income to qualify for the shorter terms. The benefit is that you build equity faster, pay your mortgage off years sooner and save many tens of thousands of dollars.
Principal and Interest
Mortgage payments are divided between principal (the amount you borrowed), and interest (the cost of borrowing money). Each month a little bit more gets applied to the principal balance (very little!). On a traditional thirty-year mortgage, the payments for the first twenty years or so will be more interest than principal.