You are now almost ready for that first substantial purchase—homeownership. Congrats! You have reached one of the most consequential stages in life. It is exciting to think about, owning your own property for the first time ever. Unfortunately, while being an immensely exciting prospect, it is also scary and a bit overwhelming to be sure. Honestly, if the prospect of owning your first home didn’t make you a bit nervous, that in and of itself would be a cause for alarm. Thankfully, there are ways to approach the event with a greater sense of peace by taking a few steps on your way there. Understanding the following points can make the entire process of first-time homeownership a bit easier and allow you to truly enjoy the experience. They are as follows:
Understand the Costs
While saving for your first home, you have likely figured out, there is a great deal of cost involved. Aside from the obvious cost of the house itself, there are two main costs associated with purchasing a home. They are as follows:
Down Payment
The down payment is the largest expense you have to save for on the front-end of homeownership. A down payment is exactly what it sounds like, a portion of the overall cost you pay upfront when you purchase your new home. Experts recommend all homeowners, not just first time varieties, aim for a down payment of at least 10% of the overall cost. That means if the home you are purchasing is $200,000, your down payment will be $20,000. Many homeowners are unable to afford to put a whole 10% down and instead pay a lower amount, like 3%. Most homeowners put down anywhere from 3-20% as their down payment. The more you can put down on your down payment, the better you will be in terms of your financial situation as you will have to take out less money on your home mortgage.
Closing Costs
Outside of the down payment, your closing costs will be the biggest financial hit when it comes to homeownership. In most cases, you can expect to pay anywhere from 3-6% of the overall home purchase price in your closing costs. You have to pay this amount after your final meeting when your final paperwork for your home purchase is being signed.
What Else You Should Know
While the two costs outlined above are the biggest chunks of money you should need to come up with, they are far from the only factors you should consider when readying yourself for first-time homeownership. The following are some additional elements to consider:
Avoid Private Mortgage Insurance (PMI)
Lenders consider their risk when determining if they will lend your money for a home purchase. One way they mitigate their risk is PMI insurance. This is a type of insurance that protects the lenders should you stop paying your mortgage payments. One way to get around this additional cost, which you pay on top of your loan payment is to put at least 20% of the purchase price down as your down payment. When you do this, it helps reduce your monthly cost by removing the PMI requirement.
There is Help Available
There are some government loan programs through the US Department of Housing and Urban Development that are designed to help first time home buyers achieve their dream of homeownership. They offer federally backed loans, tax breaks and state programs
Costs Don’t End on Closing Day
While your purchasing costs might end on closing day, your cost of homeownership will go on throughout the years you own your home. This obviously says nothing of the monthly amount you will pay until you repay your home loan. Home maintenance is another cost you need to consider when approaching first-time homeownership.
Homeowner’s Insurance & Taxes
In most cases, you will be required to keep homeowner’s insurance. It’s for good reason, it protects your home from damage, providing the means to rebuild or replace it should something happen to your home. This is an additional expense beyond your monthly payment. This cost, along with property taxes will usually be part of your monthly home loan payment as part of escrow.
The above is simple information to get you headed in the right direction towards first time homeownership.
