What Type of a First Time Home Buyer Loan Do You Need?
There is lot to learn about obtaining a first time home buyer loan. How does a first time home buyer finance his/her home? Unless your last name is Trump, most Americans need to take out a first time home buyer loan (a/k/a mortgage, home loan) to buy a home.
You may obtain a "traditional" home loan or one specifically geared toward first time home buyers. In either case, here are the basics that you'll need to know:
Adjustable Rate Mortgage (ARM Loan): An ARM loan has an initial interest rate that is often lower than a conventional fixed-rate mortgage. This initial rate is usually locked in for one or more years. Once the initial term is over, the interest rate on an ARM loan may go up within specified limits over predetermined intervals during the course of the loan. The lower initial interest rate associated with an ARM loan translates to a lower initial monthly payment. The downside is that your payment can rise considerably if the interest rates go up and your ARM loan payment continues to rise. Some people advise if you are going to live in a home less than three years, an ARM loan may work out well. However, it’s best to talk to a mortgage professional before making this decision. Many of the forclosures happening now are due to ARMs adjusting to a monthly loan payment that is not affordable for the homeowner, so choose your loan wisely!
Fixed Rate Home Loan (Mortgage): A conventional fixed-rate mortgage means that your interest rate will be the same for the entire life of the home loan. Financing for this type of loan is usually spread out over 10, 15, 20, 30 or 40 years. I’ve always gone with a fixed rate mortgage (I’m very conservative!) because I want to know what to expect for my monthly payment for the life of the loan. However, you need to decide which loan is best for you by talking to a mortgage professional before deciding on the type of loan you will have.
When you discuss loans with any mortgage broker, be sure to let the person know that you are looking for a first time home buyer loan and you're interested in any information he/she can provide. The broker may be able to provide you with additional programs and information regarding a first time buyer loan that may suit your needs.
"Pretend" to be a Homeowner!
Suze Orman recommends putting away the money needed for a home loan (mortgage) payment each month to see if you can afford to live each month. This is smart advice to consider before deciding to move forward with your home purchase and first time home buyer loan.
For example, say your current monthly rent is $700 a month and you determine that the house you would like to purchase would result in a monthly home loan amount of $1000. Since $1000 is $300 more than $700, take the additional $300 you would be paying for the home loan and put it away (in a savings account or something similar) for a few months. If you can easily afford to put away the additional $300 each month, while you're still paying all of your usual monthly expenses, you may be able to comfortably afford this first time home buyer loan amount.
Home Loan / Mortgage Calculator
There are some good home loan/mortgage calculators out there.
Here's a good one that you can use to determine if you can afford the home you are hoping to purchase.
Crunching the Numbers
The amount that a mortgage calculator (first time home buyer loan calculator) says is your monthly payment isn't always what you end up paying each month. You need to take into consideration other costs before determining what you will be paying each month.
Here are some typical numbers you can expect for a $200,000 home:
Homeowner’s Insurance – typically $3 per $1000 of the loan amount annually, so for a $200,000 home, that’s $600 a year.
Flood Insurance – if you live in a flood plain area, that cost will vary between $150 and $200 annually.
Property Taxes – these figures vary wildly throughout the US. However, a typical average is 1 to 1.5% of the cost of the home per year, so for this example, that’s $167 to $250 per month.
Private Mortgage Insurance – generally, if you borrow the full loan amount and put down less than 20% downpayment, your lender will probably require this insurance (also referred to as “PMI”). For this example, the typical PMI payment would be about $140 to $300 per month.
Association Dues/Condo Fees – most condos do require a monthly condo fee. For this example, estimate $200 to $225 per month for this fee.
Miscellaneous Fees – you never know what will happen when you own a home. A leaky roof, broken water pipe, etc. These unplanned situations can impact your monthly finances. If you plan to budget for this, try to put away about $100 a month, to be on the safe side...consider this a "rainy day" fund.
Totals – all of which is mentioned above for a $200,000 home will add approximately $364 to $614 to your monthly payment, in addition to the mortgage payment, bringing your monthly expenses anywhere between $1500 to $1700 per month (for a 6% mortgage of approximately $200,000 is a payment of about $1200.00 per month).
Obtaining a Home Loan / Mortgage
When you are searching out where to obtain a first time home buyer loan/mortgage, it helps to do some research.
When we bought our first home (a HUD house), I did research on the internet first and then found a local mortgage company that we met with in person with to answer our questions. We found this helpful because the mortgage broker spent time with us and answered my (many!) questions about first home home buyer loans and about the special requirements for financing the HUD house. Do your research by talking to local banks, lenders and mortgage companies and find a company you feel comfortable with before deciding to give them your business. Having a "face to face" discussion and local person to help when you need assistance can be a great benefit, especially for first time home buyers obtaining a first time home buyer loan.
When we bought our second home, we also went through a local mortgage company. Since we already "knew the ropes," we chose the mortgage company that gave us the best interest rate and best customer service. (It's very important to me to have a company that answers your calls/emails promptly and professionally.)
When we refinanced our second home to get a better interest rate, we decided to use Lending Tree.
The best thing about Lending Tree (for us) was that we could "interview" the lenders to see if they would meet our needs before deciding on which company to choose. We chose a company that provided not only a competitive home loan and interest rate, but one with with excellent customer service. We were very happy with the lender we chose from the "offers" that Lending Tree provided.
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