Purchasing a home is without question a daunting task, especially if it is your first home. It’s likely the largest purchase of your life thus far, so you will want to ensure that everything runs smoothly. As a potential first time home buyer you may first wonder, “Should I rent or buy?” Here’s what you need to do:
Determine Your Buying Objectives. Why do you want to buy a home? Need more room? Downsizing? Tired of paying a monthly rent for nothing in return?
Determine Your Needs. Prioritize what is most important to you in a home (style of home, size of home, neighborhood, schools, cost, etc.). Keep in mind, there is a difference between what you need and what you want, so be realistic.
Become Informed. If you’re a first-time home buyer, learn everything you can about the buying process. Research the market by searching the Internet to see what homes are for sale in the areas you desire, as well as looking at classified ads and homes for sale magazines, and maybe even driving around neighborhoods you’re interested in. After that you should have a good feel for what’s available.
Get Your Financing in Order. This is not the time to make any major purchases on a credit card. Don’t change types of work. Remember, you’ll probably be living in your home and making repayments for many years to come, so make sure you shop around and do your homework.
When you carefully choose a home you can afford, the outcome can be significant. By paying your mortgage, you are building equity in a place of your own. Equity is the portion of the property that you actually own. It is important to stay in a home long enough to build equity. This allows you to “keep” some of what you’ve paid. Also, while you’re making your payments, your home generally appreciates in value. After a number of years the equity you’ve paid into your home plus the appreciation will usually overcome the extra money you had to pay to get into the home.
Tax Advantages: As a homeowner, you can deduct on your federal and state income taxes the amount of mortgage interest and real estate taxes you pay each year if you itemize deductions.
Once an Owner, Always an Owner: A first home often leads to a better second home. Owning and properly maintaining the property also offers a sense of accomplishment.
Retirement Savings: Long-term home ownership can provide beneficial retirement security through the growth of equity.
Security: A feeling of security that comes from owning a home and the knowledge that your home is a safeguard against inflation. You are the only one that will have the keys.
Sense of Pride: This is a “feel good” reason -- but it’s true, at least for most people. You’ll have a greater sense of accomplishment when you own a home.
Better Credit Opportunity: It will be a lot easier to apply for other loans if you already own a home. You can build equity over time and borrow against that equity if you choose to. Credit card companies typically favor homeowners, which is why you’ve probably noticed that one of the early questions on credit card applications is, “Do you rent or own a home?”
How much home can you afford?
After you determine whether you want to rent or buy, you will need to determine a price you can afford. According to a general rule of thumb, you can afford a home that costs two and a half times your annual salary. But determining how much you can afford to spend on a home is not quite so simple. Since most people finance their home purchases, buying a home usually means getting a mortgage. So, the amount you can afford to spend on a home is often tied to figuring out how large a mortgage you can afford.
To figure this out, you’ll need to take into account your gross monthly income, housing expenses, and any long-term debt. Heartland Bank has the flexibility to provide you the loan program that best fits your needs. To find out how much you qualify for and to learn more about our mortgage programs visit our financial calculators can help you compare the cost of renting versus the real cost of buying a home.
Finding Your Best Fit
Now that you know how much you can afford, you will be able to shop and compare the different types of mortgages and determine which one fits you the best.
Adjustable Rate Mortgage (ARM):
- Offers a fixed initial interest rate that is often lower than Fixed Rate Mortgages.
- Rate and payment will adjust after the initial period. Payment may go up or down.
Fixed Rate Mortgage:
- The interest rate is set for the length of the loan
- Interest Only Mortgage, Balloon Mortgages, Shared Equity Loans, Reverse Mortgages. These are specialty mortgage products that need to be investigated carefully before any commitment. Competent advice from a financial professional and/or attorney should be sought .
- A conventional loan insured by the Federal Housing Authority.
- ARM - Initial interest rate is often lower than market rates. Rates after the initial period may be lower than the fixed rates offered at that time.
- Fixed - You know exactly what your monthly payment will be for the entire term of the loan (usually 15, 20, or 30 years).
- Miscellaneous - These mortgages are to fit certain needs and allow individuals to borrow money or purchase homes in unique circumstances.
- FHA - Allows home buyers to purchase homes with lower down payments. Lenders using the program will often allow lower credit scores and higher debt ratios to qualify for the mortgage.
- ARM - Your rate and payment could increase after the initial period is over (usually 5 or 7 years). It is important to know how much your payments can increase and if you can afford the highest possible increase.
- Fixed - Sometimes these mortgages can be more costly than other mortgage types.
- Miscellaneous - These mortgages are often complicated and/or higher priced ways to borrow. It is very important to understand rates, terms, costs and special provisions of the loan. Your responsibility to the lender frequently goes beyond making your monthly payments to pay off your loan.
- FHA - Borrowers pay an FHA funding fee as well as mortgage insurance. These costs may be higher than private mortgage insurance. Lower down payments mean that it will take longer to build equity in homes. Although higher debt ratios are allowed, borrowers should be careful to consider their ability to make payments. It is possible that the lender may allow the higher ratio but the borrower will not be able to afford the payments.