Buying your first home used to be a symbol of adulthood. But many millennials and members of Generation X have put off the home-buying process into their late 30s, 40s and 50s.
In fact, thanks in part to my generation’s average $37,000 in student loan debt, the average age of first-time homebuyers has risen to 33, up from 29 and 30 in the ‘70s and ‘80s.
If that’s you, there’s no need to play the comparison game, says Bobbi Rebell, a Certified Financial Planner, author of How to Be a Financial Grownup and host of the podcast, “The Financial Grownup.”
“It’s great to be buying and building equity through the home-buying process, but just because you own a house doesn’t mean you’re grown up financially, or vice versa,” says Rebell. “It’s about making the smartest money choices for you.”
Here’s cheat sheet to the various things you should know about buying your first home.
Just like you’d never run a marathon without training first, you shouldn’t jump into buying your first home without doing the prep, either.
First, work on strengthening your credit score, making sure you have enough emergency savings, and consider refinancing any outstanding credit card and student loans to the lowest rates possible. When you’re ready to begin the home-buying process, this can help you lock in the best possible interest rates for a mortgage when you are ready to make the jump.
Next, figure out what you can afford and what sorts of mortgage rates you might shoot for, with an online calculator. This can also help you set your expectations around the cost of homeowner’s insurance, property tax estimates and private mortgage insurance (PMI), or the extra insurance you’ll likely need if you can’t make the typical 20-percent down payment.
Current wisdom is that a potential mortgage should be no more than 30 to 50 percent of your take-home salary after taxes, says Kelly Gushue, founder of Personal Finance Warrior.
First things first. Start by building a plan to put away enough each month for a down payment and closing costs, without forsaking your emergency fund and other core financial goals.
“Take a year and do whatever it takes to cut costs and save,” advises Gushue. “It’s only temporary.”
Three to six months before you’re ready to truly start the home-buying process, start researching homes on sites like Zillow, Trulia and RealEstate.com (a new site within the Zillow group designed for first-time buyers struggling with affordability) to gain a sense of the market where you plan on buying your first home.
There are several types of mortgage loans that you’ll need to consider. Here’s a brief rundown.
The first factor to think about when differentiating between types of mortgage loans is whether the interest rate changes over time.
A fixed-rate mortgage loan will maintain the same interest rate during the whole repayment term. In other words, if your rates started out at 4 percent, it’d stay at 4 percent until your mortgage is paid off. Fixed-rate mortgages are offered over a specific period of time, or term. The most common is 30 years, though some mortgages may span 15 years or some other duration.
By contrast, an adjustable-rate mortgage will have an interest rate that changes over time. Often, that means that you’ll get a new rate every year.
Some mortgage loans are a hybrid of fixed and adjustable, such as loans that start off at a fixed rate before switching to an adjustable rate. For example, some loans might come with a fixed interest rate for the first five years, before switching over to an adjustable rate that could change annually.
One reason some people choose an adjustable-rate mortgage is that these often start off with a lower interest rate. That can be difficult for some, however, because they’ve essentially pre-agreed to any future rates that their lender throws at them, even if the rates go up later on. On the other hand, fixed-rate mortgages often start out at a somewhat higher interest rate from the get-go, but there’s less risk of an unpleasant surprise.
The government offers some types of mortgage funding, such as FHA or VA loans.
FHA loans are managed by the Department of Housing and Urban Development, and can make the home-buying process smoother because you can often get by with a smaller down payment. That said, if you put down a small down payment, there’s a good chance you’ll need to shell out extra money for PMI, the mortgage insurance we mentioned above.
If you’re a veteran, you might qualify for a VA loan from the Department of Veterans Affairs. Probably the biggest advantage of a VA loan is that you can receive 100 percent financing, meaning that you literally might not need to put anything down at all to get started.
Some rural borrowers who meet certain income requirements might qualify for a loan from the Department of Agriculture, as well.
Outside of these options, you might choose a conventional loan—meaning from a private lender rather than the government. These come with different terms and stipulations, and may require a larger down payment.
When considering types of mortgage loans, you’ll need to think about how much you want to borrow. When the mortgage industry refers to a “conforming loan,” they’re talking about a mortgage that meet the underwriting principles of Fannie Mae or Freddie Mac, the two government-controlled companies that buy mortgage loans and re-sell them to Wall Street investors. So conforming loans fit within pre-established size limits and criteria.
A jumbo loan, as you might guess, is a mortgage that exceeds Fannie Mae and Freddie Mac’s “conforming” limits. Because lenders take on more risk when they grant this kind of loan, borrowers typically need to have excellent credit, make bigger down payments and agree to higher interest rates in order to land this kind of loan.
Mortgages payments are generally set up with a “term” in mind, or a period of time over which you’re expected to pay off the loan.
In an ideal world, you’d stay in your home for five to 10 years in order to ride out any market dips, in which case a 30-year fixed rate loan might make the most sense. However, if you’ve got some uncertain variables like relocating for work or possibly caring for a parent in the future, try not to stress.
“I ask my clients: Do they really think they’ll still be living in the same home in 30 years?” says Rebell. “Life is no longer like it was. People often sell sooner than they expect to.”
If you find yourself in analysis paralysis mode, take a deep breath. Rebell says, “Just make the best decision you can with the information you have now. Worst-case scenario, you have to sell sooner than you expected, and you lose some money. At least you will have been building equity versus throwing money away in rent.”
While doing your research, you might catch wind of something called mortgage protection insurance, not to be confused with PMI, which was mentioned above.
Mortgage protection insurance is a policy to help your loved ones have the financial support to be able to continue making mortgage payments if you were to unexpectedly pass away. Be sure to understand all of your options when it comes to life insurance, and to choose the right kind of policy for your needs; often, this will be a traditional life insurance policy rather than a mortgage protection insurance policy.
When it comes to buying your first home, it pays to negotiate like a millennial. According to one survey, 66 percent of millennial sellers have tried to negotiate with the listing agent for a lower commission, and nearly two-thirds of them reported being successful. Nearly half of buyers said they were able to get a refund, closing-cost contribution or other consideration from their agent worth $100 or more.
“Check with your banks, mortgage brokers and online lenders for all the options and don’t be afraid to be assertive, especially if you’ve got a credit score over 740,” suggests Stefanie O’Connell, millennial financial expert and author of The Broke and Beautiful Life. “Be prepared to negotiate on rates, closing costs and processing fees. Getting one waived could save you hundreds of dollars.”
There’s an old adage: Look for the worst house on the best block. If you can score a home that costs about 20 to 25 percent less than what a property in good condition would cost you in the same area, you’ve probably scored a great deal.
Consider what else you "get" with this place. Does it reduce your commute? Is it in a good school district?
When you’re looking at properties online, try filtering for properties that have been on the market for longer than 30 days to score a potential hidden gem. Just be sure to work with your inspector to thoroughly check for issues, especially in the basement or on the roof, which can be the most costly to repair.
“I can’t tell you how many times I hear people stressing out because they feel like they have to jump on a deal or buy when interest rates are low or a neighborhood is gentrifying fast—but they’re also getting married, having a baby and making job changes,” says Rebell.
Before deciding that now must be the time when you should buy a house, be kind to yourself and any other things you’ve got going on in your life.
“The market is always fluctuating and life events are always changing,” says Rebell. “Concentrate on building a strong foundation in your personal life first, and then work on buying something when you’re ready.”
At the same time, remember there’s no one perfect answer on when to buy a house. Say you haven’t paid off all your debt yet, but you’ve got a steady income, savings and can find a way to secure a down payment. If that’s the case, it still might be a good idea to think about buying your first home if you find a great deal in which the monthly mortgage payments are lower than what you’re currently paying in rent.
“Some people carry debt their whole lives, and if that’s the case, you could be waiting forever to buy a home,” says Rebell. “If you lose a job or end up on shaky ground, buying and building up equity could still be a better option, since if those things happen, you’d still be on the hook for the rent, anyway.”
Chances are, you may be in a better position security-wise than those who jumped in before the housing bubble crashed. Plus, you’ve likely learned valuable lessons in life that will translate to the home-buying process now and help you make savvier decisions.
So if you’re like many millennials and have been holding off on homeownership, fret not. After all, good things often come to those who wait.
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