A home is likely the most expensive investment of your lifetime, so it is important to begin the homebuying process by getting your financials in order. As a homeowner, you'll have additional expenses beyond your mortgage payment: there are property taxes, homeowner's insurance premiums, utility bills, and the general costs of home upkeep. To avoid unforeseen financial stressors, do your research about the mortgage process before looking at homes, discuss your options with lenders, and consider working with a certified housing counselor.
We’re kicking off our four-part series on how to avoid homebuying mistakes. Today, we’re talking money.
Set Your Budget and Stick to It
One of the first steps in the homebuying process is to fully understand your finances. It's not as fun as shopping for a home, but it's necessary to help determine what you can afford. Start by asking yourself the following questions and gather all your supporting documentation:
Only Look at Homes You Can Afford
Once you start looking at homes, it can be tempting to explore houses that are slightly outside of your budget. At the end of the day, looking at homes outside of your price range will leave a sour taste in your mouth. Work with your real estate agent to find a home that fits your lifestyle and budget.
TIP: Get prequalified or preapproved for your mortgage by a local lender to get an exact price range for houses you can afford.
Choosing the Right Mortgage
Selecting the right mortgage may make a big difference in your monthly payments and the overall cost of your loan. There are two main types of mortgages—fixed rate and adjustable rate—and it's important to carefully consider which type of mortgage works best for your lifestyle.
The primary benefit of a fixed rate mortgage (FRM) is inflation protection. Your interest rate won't change, which provides more financial certainty over the long-run. Nearly 90% of today's homebuyers choose a 30-year fixed rate mortgage.
By comparison, an adjustable rate mortgage (ARM) is a loan with an interest rate that will change throughout the life of the loan. Your monthly payments may change over time, and you need to be prepared for the possibility that your monthly payment may increase. This type of loan is ideal for those who plan to live in their home for less than the rates' adjustment period.
Mortgage rates are quoted in terms of interest rate and APR (Annual Percentage Rate). The interest rate is purely the cost of borrowing the principle loan amount, whereas the APR includes additional mortgage costs such as insurance, discount points and closing costs.
It's important to shop around and talk with multiple lenders to ensure your mortgage falls in line with your financial goals.
Check back for part two of this series where we’ll talk about finding the “right” home. Visit My Home by Freddie Mac® for resources to help you make informed decisions during your homebuying process.