Like making the perfect music playlist for your road trip that thrills all passengers, buying a home requires that you build a "homebuying playlist" of sorts – one that makes your journey less stressful and more successful.
As you build your homebuying playlist, it's important that you do your homework and focus on the key components of the buying journey, from getting pre-approved to the costs involved.
Some must-have components for a successful playlist:
Keep in mind what you are making the playlist for, what your goals are, and how each element is vital for the overall experience. Playlists have an order.
Down Payment – A portion of the price of a home that you pay up front, usually between 3-20%.
Credit Score – Your credit score is a single number, ranging from 350 to 850, that represents and summarizes information from your credit report, indicating your likeliness to repay your debt. Generally, your credit score plays a significant role in getting approved for a loan and the interest rate you are charged — the higher your score the better.
Pre-approval Letter – It's highly recommended that you work with your lender to get pre-approved before you begin house hunting. A pre-approval letter will tell you how much home you can afford and can help you move faster and with greater confidence.
Private Mortgage Insurance (PMI)– PMI is a monthly premium required by your lender if your down payment is less than 20%, protecting the lender if you are unable to pay your mortgage. Get the low down on PMI.
Closing Costs – These are fees charged by the people representing your purchase, including your lender, real estate agent, and other third parties involved in the transaction. Closing costs are typically between 2 and 5% of your purchase price.
Points – Sometimes called discount points, these are up-front payments typically used to reduce your mortgage interest rate on the loan to obtain a lower monthly payment. A point is 1% of your loan amount, or $1,000 on a $100,000 loan.
Appraisal – Once you make an offer on your home, your lender will order an appraisal to get a professional opinion on the value of the home. This is usually performed by a qualified appraisal professional who estimates the value of a property by taking current market values of similar homes and the quality of the home into account.
Annual Percentage Rate (APR) – The annual rate it costs you to borrow over the term of the loan, including the interest rate, points, fees and certain other charges you are required to pay. The APR is the bottom-line number you can use to shop and compare rates among lenders.
Fixed-Rate Mortgages (FRM) – A fixed-rate mortgage has an interest rate that does not change during the entire term of your loan. This is the most common type of mortgage, giving you certainty and stability over the life of the loan.
Adjustable-Rate Mortgage (ARM) – A type of mortgage with an interest rate that adjusts after an initial period of time — typically 3, 5, or 7 years — and resets periodically. ARMs usually give you lower monthly payments at the onset, but over time your payments will change with interest rates.
A good playlist can take you far, even saving you significant time and money on your journey. Take your time to plan it out well and you'll enjoy smooth sailing (and maybe dancing too!).