I love my home. I’ll admit that I’m a bit of a workaholic and don’t get to spend as much time there as I’d like, but when I do come home after a long day at work, I’m so happy to have a nice, comfortable home that’s mine, all mine. One of the many great things about living in mid-Michigan is there are a lot of fantastic, yet very affordable, homes in the area. Because the housing costs are relatively low around here (as opposed to, say, the downtown NYC or Chicago condos I sometimes dream about), homeownership was something I attained pretty early on. And let me say, I was so happy to get out of the renting game while in my 20s and get a place of my own. No landlord on my case, no worries about losing my rental deposit if I want to paint the walls of my living room, no upstairs neighbors stomping around in the middle of the night — having my own house is the best. Buying Your First Home Although the state of the housing market is far from great right now, one upside is that first-time homebuyers have a large selection of well-priced houses to choose from. If you’re thinking about taking the plunge and purchasing your first house and you need some help financing your dream home (like most of us do), read on! It’s easy to be intimidated by the home financing process — people start throwing words at you like “amortization” and “escrow,” and everything can seem a bit daunting. Try not to get overwhelmed. Take a few steps to learn the important numbers when applying for a home loan, and you’ll feel much more confident about the whole experience. Know the Score When applying for a mortgage or other type of loan to help finance your home, the first number you’ll want to check is your credit score. Your credit score and credit history can be major factors in whether or not you qualify for a loan and often determine the interest rate you receive on your loan, so be sure this is all in order as early as possible. You can receive a free credit report from each of the three major credit bureaus annually at www.annualcreditreport.com, but you’ll typically have to pay a fee to receive your credit score. If you notice any negative history or inaccurate information on your report, contact the companies reporting the negative or inaccurate information to see what you can do to improve or correct these accounts. Do the Math This really isn’t as bad as it sounds. We’re not actually doing trigonometry or calculus here — just some basic number crunching that can usually be accomplished with free online calculators. There are a few important numbers you’ll want to figure out when looking at home financing. How much can you afford for a mortgage payment? Most home loans require a monthly payment, so it’s good to get an idea of how much you can comfortably afford each month before you get your heart set on a house or mortgage that’s out of your reach right now. Search for “mortgage payment calculator” to find many online calculators (including some at www.msufcu.org) that can help you determine if a certain home price will break down to a monthly payment you can afford. Don’t forget about tax and insurance costs. Homeownership also comes with fun responsibilities like paying property tax, homeowner’s insurance and sometimes additional costs like flood insurance. Depending on how your home loan is set up, these costs might be distributed over the entire year and added to your monthly mortgage payment (this will happen when your tax and insurance costs are put in an escrow account), or you might be responsible for paying these yourself at a few points throughout the year. Either way, just be sure you’re taking these extra costs into consideration. How much do you need for a down payment? To qualify for a mortgage, you typically need to make a down payment ranging from 5-20 percent of a home’s purchase price. Keep in mind that the larger the down payment you’re able to make, the lower your monthly mortgage payments will be. Also, if you’re able to make a down payment of at least 20 percent, you can avoid paying private mortgage insurance (PMI ) — another insurance cost you’ll need to consider. If you’re like many new homeowners, you may not have a full 20 percent down payment, but you may be able to make a down payment you can afford (like 10 percent of the purchase price), and pay PMI if required. Estimate other costs and fees. When you’re looking at home financing options, you’ll want to research the additional costs for which you’ll be responsible. Most lenders charge an application fee for mortgages, some charge prepayment penalties, and you’ll almost certainly pay some closing costs for your loan. If you’re considering a certain lender for your mortgage, ask them for a good faith estimate of these costs up front so you know what to expect. And, of course, what’s your interest rate? A loan’s interest rate or annual percentage rate (APR) is always an important factor, but it has an even bigger impact when it applies to a higher-balance, longer-term loan like a mortgage. Look at home loan interest rates at a variety of lenders to get an idea of what a typical rate is when you’re applying, and check out websites like www.bankrate.com for additional rate information. When you look at interest rates, don’t forget to also consider the other numbers like closing costs, application fees, etc. One lender might have a lower interest rate than another but charge a ridiculously high application fee and assess prepayment penalties if you ever want to make additional payments on your mortgage. Be sure to look at all the numbers above and research a variety of loan terms and options to find the financing that works best for you.
April Clobes is Executive Vice President/Chief Operating Officer for MSU Federal Credit Union in East Lansing. She can be contacted by e-mail or by calling (517) 333-2254.