Everything You Need to Know About Buying A Home


    From mortgages to closing costs, here’s how to prepare.

    Couple relaxing after buying a home
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    You’ve been thinking about it for a while and have decided that you want to take the plunge — into buying a home, that is.

    Whether you’re buying your first home or you’re ready to find your dream home, you’re about to take on a lot of financial responsibility, and falling in love with a property that’s a stretch — or totally out of reach — for your budget is no way to start. Here are some key things to understand about the homebuying process before you commit to your new home.

    Family moving carrying boxes

    BUYING A HOME IS MORE THAN A MORTGAGE

    Your mortgage payment covers principal and interest on your home loan, but it’s actually
    just one facet of the big picture. There are a number of other costs to consider:

    • Home icon

      HOMEOWNERS INSURANCE

      Premiums can range from $300 to $1,000 annually. For a rough estimate, divide the value of your home by $1,000 and multiply by $3.50.

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      Property Taxes

      Median property taxes range from 0.18 percent to 1.89 percent of the home’s assessed value and are determined at both your county and state level, so be sure to check your county and state’s tax rates.

    • Home over hand icon

      Private Mortgage Insurance (PMI)

      If you don’t have a 20 percent down payment, your lender will probably require you to get PMI to protect against default. PMI rates usually range from 0.3 percent to 1.2 percent of the loan.

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      Homeowners Association (HOA) Fees

      These fees can range from $200 to $400 per month for most cities, although fees can vary or increase dramatically depending on variables like location and services offered.

    Once you have a handle on the monthly home-related expenses involved, you can begin to zero in on what you can afford. Another way to back into a realistic number is to use the rule of thumb typically used by lenders: Your monthly housing expenses should not exceed 28 percent of your pretax income, and your total combined debt (your housing costs combined with all other monthly debt, such as student loans, credit card payments and the like) should not exceed 36 percent.

    QUALIFYING FOR A MORTGAGE — THE FINER POINTS

    Once you’ve targeted how much you can afford, you need to qualify for a mortgage to finance your home. The less financially stable you appear, the less likely you’ll be able to get a mortgage with favorable terms — or get one at all. Your standing in four different areas will impact this, and determine how much interest you may have to pay on your loan.


    Couple looking at tablet

    Why Get Pre-Approved

    How does all of this fit in with the “pre-approved” mortgage we hear so much about? It’s definitely helpful to have one, but understand what it really is — or rather, isn’t. A pre-approval is ultimately a letter from a lender that shows you’re qualified to borrow a specific amount of money, which can give you a competitive edge against other bidders.

    Even though it’s not the mortgage, per se, it’s a tool that shows you’re serious and qualified to borrow. To that end, some sellers won’t even consider an offer unless it comes with lender pre-approval. Your lender’s inquiry will usually show up on your credit report, so ideally you only want to get it done once. Because pre-approval letters are typically valid for about 60 to 90 days, you want to be careful when you decide to seek out a pre-approval — it should be when you’re serious about the house hunt.

    Quote Some sellers won’t consider an offer unless it comes with lender pre-approval.


    CHOOSING THE RIGHT TYPE OF MORTGAGE

    Mortgages are not one-size-fits-all. There are three main factors you should look at when choosing a loan: the term, interest rate and type of loan. All can have a different financial impact in the short and long run.

    As a general rule of thumb, the longer the term (or life of the loan), the lower the monthly payment, but the more you’ll pay in total interest. For example, let’s say you have a $150,000 loan with a 3.5 percent interest rate. If you have a 15-year mortgage, your monthly mortgage payment (principal and interest only, excluding taxes, homeowners insurance and PMI) would be $1,072, and the total you’d pay in interest over the life of the loan would be $43,020. If you had a 30-year mortgage, your monthly payment would be $673 — but you’d pay $92,485 in total interest.

    It is possible that your interest rate could change over the life of your loan. That’s because you can opt for either a fixed-rate or adjustable-rate mortgage. With a fixed-rate mortgage, you lock in your interest rate for the life of your loan, regardless of whether national interest rates change. This is great if interest rates rise. If they fall, you could refinance to try and take advantage of the lower rates, though there will be additional costs associated with refinancing.With an adjustable-rate mortgage (ARM), your interest rate remains constant for a set period of time, say three, five or seven years.

    15-year vs 30-year loans

    15 verse 30 year loan graph

    When that period is up, your interest rate would then adjust. If national rates rise, your mortgage rate can increase; if they fall, your payment could decrease.

    Finally, there are three main types of mortgages you can apply for: Conventional loans, Federal Housing Administration (FHA) loans and those that fall under Special Loan Programs. The Consumer Financial Protection Bureau outlines these in detail as well as the pros and cons of each to help you make a more informed decision. But at a high level, here are easy ways to distinguish among them.


    Young couple smiling

    Types of Mortgages

    • Conventional
      Loans


      These are the most common,
      and they typically require a
      20% down payment to avoid
      having to pay PMI.

    • FHA
      Loans


      Backed by the government,
      these allow for lower down
      payments and credit scores
      in exchange for possibly
      higher costs.

    • Special Loan
      Programs


      Department of Veteran’s Affairs
      (VA) loans, U.S. Department of
      Agriculture loans, state and local
      programs help make home
      ownership more affordable.






    Bottom line: Shop around. This is going to be one of the biggest purchases of your life, so it’s important to understand what options are out there that could save you the most money.

    CLOSING THE DEAL

    Once you’ve made an offer on a home and it’s been accepted, the process of actually paying for the home will begin, and that happens in different phases.

    When you make the offer, you’ll need to submit “earnest money” — about 1 to 2 percent of the purchase price of the home. If you back out of buying the home for any reason that isn’t stated in the contract, the earnest money goes to the seller. If the deal closes, it’s then applied to your down payment.The down payment is anywhere from 3.5 to 20 percent (or more) of the purchase price. Putting at least 20 percent down negates the need to purchase PMI, and also helps you get a better interest rate.

    So if possible, aim to put down at least 20 percent.

    Finally, there are closing costs to consider, and these typically run you between 2 and 5 percent of the purchase price. There are a number of fees involved that you’ll need to pay for, such as appraisals, inspections and taxes.

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    Here is a checklist of some common
    closing costs that can help you prepare:

    • Loan Origination or Processing Fee
    • Appraisal
    • Home Inspection
    • Credit Report Closing Fee or Escrow Fee
    • Title Search or Exam Fee (to ensure no one else can claimto own your property)
    • Survey Fee (for the survey company that may have to verify property lines)
    • Attorney Fees
    • Loan Discount Points
    • Homeowners Insurance
    • Prepaid Interest
    • Recording Fees (charged by your local recording office, which records the deed)
    • Escrow Deposit for Property Taxes and Mortgage Insurance
    • Homeowners Association transfer Fees
    Woman holding a ring of keys






    Once you’ve been handed the keys — congratulations! You’re officially a homeowner.

    It’s now a good time to revisit your budget, as you’ll have to account for costs that often add up for new homeowners, such as furniture you may want to buy or appliances you may want to replace. It’s also time to look into the types of insurance policies you need to protect your new investment, as well as your ability to pay for it. Consider talking to a financial planner or professional in order to help you navigate your early years of homeownership.

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    Derick Faust

    Derick Faust is a Realtor and marketing manager/team member of the Love Where You Live OH Real Estate Team. He is a native of Central Ohio and attended Franklin University, Ohio University, and the Muskingum Area Technical College. Derick's knowledge and business acumen uniquely prepares him to go above and beyond in order to meet the needs of Buyers and Sellers. He is a member of the Columbus Board of Realtors, Ohio Association of Realtors, and the National Association of Realtors. The Love Where You Live Real Estate Team established itself as a team of trusted real estate advisors in the communities of Westerville, Worthington, Grandview and Grove City and serve ALL of the greater Columbus area. Purposefully partnering with the elite, ERA brand and by locating our office at the south entrance into Historic Uptown Westerville, we bring the power of an International brand with a Boutique "feel" and level of service to all our clients. The Love Where You Live OH Real Estate Team is continuously building a reputation within the industry, and among our peers as dedicated, competent, consummate professionals. The Team Leader, Rob Pemberton has "hand-picked" every team member because of their character, their personal code of ethics and their dedication to serving our clients according to our motto that "doing the right thing is always the right thing". It is possible, in this industry, to combine Competence & Caring and this goal is at the heart of The Love Where You live Real Estate Team. ERA Real Solutions Realty has offices in Cincinnati, Grove City and Westerville, Ohio. ERA Real Solutions Realty is the fastest growing ERA brokerage in the Nation.

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