Central Ohio First-Time Home Buyers:
Understanding Your Mortgage
Buying your first home is exciting! But there’s a lot to keep in mind, and a lot of details that are important to understand, especially on the financial side of things. Mortgages and mortgage payment can be especially confusing, so I’ve created a guide to help you understand some of the details of your mortgage.
What is a Mortgage or Loan?
There are a lot of loans out there, and a lot of different lenders, which means there are a lot of mortgage options available to home buyers. Loans can finance up to 100% of your home, or can be used to pay the remainder of the price after a down payment is made. Banks, credit unions, and even family members can be lenders. And they all offer different rates and stipulations. That’s why it’s especially important to do your shopping and not settle on a loan until you’ve talked to AT LEAST two lenders.
Types of Mortgages
There are four main types of government-backed mortgages used by 90% of all buyers:
Conventional: This is your standard “loan”, used by buyers with good to excellent credit who make down payments of at least 10%. However, there are programs within the conventional loan that offer options for a 3% down payment to buyers searching in less-than-ideal locations such as lower-income neighborhoods, disaster zones, and minority neighborhoods, or buyers with excellent credit scores.
FHA: These are available to buyers with below-average credit and offer a down payment as low as 3.5%. However, these mortgages do also require mortgage insurance premiums, which can result in higher overall costs, even if their rates are lower.
VA: All veterans and active military members qualify for VA loans, which offer up to 100% financing, simplified loan approvals, and access to some of the lowest rates available. They can be much lower than conventional loans.
USDA: These loans are available to buyers in rural or low-density areas and offer up to 100% financing. They often assist buyers of average means with lower-than-average credit scores looking for modest homes, and often offer below-market rates. Additionally, because of the government’s loose definition of the term “rural”, many of the buyers in the Central Ohio communities surrounding Columbus will qualify for this loan.
Parts of a Mortgage
You might think that your monthly mortgage payments consist only of the price of your home, but in truth, they are actually comprised of four parts, known collectively as “PITI”. All four parts need to be taken into consideration when calculating your monthly budget.
Principal and Interest: Your monthly principal and interest payments are determined through the total principal (the original loan amount or the price of your home), your interest rate, and the total number of years in your mortgage.
Taxes: Your annual state real estate tax is typically 1-2% of your home value and is divided into 12 monthly payments.
Insurance: Homeowners insurance is required, and typically costs .25-.5% of your home value annually, again broken into 12 monthly payments.
Determine Your Budget & Start Shopping
Once you’ve selected your mortgage and are ready to start searching homes for sale, it’s time to determine your monthly budget, which will be used to calculate the price range of your home. Keep in mind that your mortgage cost will be based on both the price of the home and the current interest rates—which can change on a daily basis. This means the same home can be either affordable or unaffordable based on interest rates.
Find a Realtor to Guide You
Buying your first home can be a bit overwhelming, which is why it’s important to choose your agent carefully! You’ll want to work with a Realtor with extensive experience in your area and in working with first-time buyers. Contact me today to learn more about how I help my first-time buyers.