Making the leap from renting to buying a home can be a very daunting experience for the uninitiated. Not only are there mortgage lenders who will scrutinize your credit, offer complex mortgages, and throw in hidden costs, but there are also the time, energy, and money that goes with general upkeep and repairs. However, you can find many upsides to buying a home, and navigating the difficulties is worth it in the long run.
The first thing to make sure of is that you have an excellent credit score. Comb over your report for any errors, and spend a few months paying down on debt if necessary to bump up the score. Also, don’t assume that paying your bills on time every month automatically guarantees a high credit rating. Part of your score includes comparing the amount of credit you have available to how much you’re using. One way to improve your score is to consolidate debt. Excessive amounts of liability will cause a dip in your score and possibly lower your rating.
Even with good credit, if your monthly cash flow is not more than enough to take care of your current bills, you won’t be able to tack on a mortgage and all the other costs of owning a home. One method of dealing with high monthly bills is to refinance high-interest debts. For example, if you are a college graduate, you probably can refinance your student loan and shave off a few percentage points. In addition to refinancing, develop a budget that will be comfortable but also let you sock money away for when you need it.
The down payment is very important to determine what the interest rate and payment structure of the mortgage will be. Traditional thought says that you need at least 20 percent of the total cost when you sign the contract, but there are many programs available, especially for first-time buyers, that accept down payments as low as 3.5 percent. However, buyers paying low down payments will have to pay a premium for mortgage insurance to the bank.
Mortgages offered by lenders will either include a fixed or adjustable rate. Fixed-rate mortgages will stay at the same percentage throughout the life of the loan, while adjustable rate mortgages (ARMs) will fluctuate according to current market conditions. Some ARMs start with a low introductory percentage that balloons after a few years. There are also mortgage points, which are fees equal to 1 percent of the loan. They are used by lenders to offset bad credit scores or as an option to lower the overall rate. In some instances, purchasing points can save money over the life of the mortgage.
Ultimately, the choice to become a first-time homeowner is a complex one that involves weighing many factors, financial and otherwise. Once you have all your financial affairs in order and are looking for a mortgage, be sure to shop around for what will be best for your situation.
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