The Ultimate Short Guide to Buying a Home for the First Time
Home ownership is awesome. You don’t have to pay rent, you get to put your money into an asset, and you can paint the walls or change light fixtures whenever you want – no landlord required – but it isn’t right for everyone. Before you buy your first home, make sure you understand all of your options.
Remember: When it comes to buying a home, what you don’t know can really hurt you.
Are you Ready to Buy?
Being a homeowner is a big deal. When you buy a house or apartment, you are taking on a major responsibility. If something breaks, it’s on you to fix it. That might sound fine in theory, but keep in mind that if your furnace breaks in the middle of winter or your faucet starts shooting water, you are going to have to shell out for repairs – paying for the service call as well as the extra emergency fee. Plus, there is maintenance to consider. You will have to do things like change your furnace filters, clean your gutters, wash the windows, mow the lawn, shovel snow, and more. That means that if you go on a long vacation, you will have to hire someone to maintain your home while you are away– it’s a big deal.
Sometimes Renting is Better
The truth is that sometimes renting is better. If you aren’t ready to take on the responsibilities of homeownership, you should definitely pass on buying a property, but that’s not the only situation in which renting is better. Renting is a better way to go for people who move around often, either for work or the fun of the experience. You might also want to stick with renting if you are new to a city and are unsure which neighborhood you’d like best or if you have a bad credit score. Usually, the lower your credit, the more you will pay in interest. Sometimes, waiting a year is the better idea. You’ll be able to save more money for your down payment, and your credit score gets a chance to recover.
Owning a Home is Best
However, those situations are pretty rare. For most people, owning a home is best. You’ll be able to put your money into an asset every month for less than you would probably pay in rent – it is like an automatic savings plan that lets you live there! Plus, your payment remains the same over the length of your loan while your rent will slowly creep up. There are also some pretty cool tax benefits. Your mortgage interest is tax-deductible, as is your property taxes and certain closing costs.
Most of all though, there is the bragging factor. You OWN your own home. How cool is that?
There are Many Paths to Home Ownership
Just because you are buying a home, it doesn’t mean you have to stay there for the rest of your life. Think outside the box, friend. There are many paths to home ownership. Let’s take a look at some of your options.
Option 1: Buy Small, Rent Later
Let’s say you aren’t sure if homeownership is right for you or money is an issue. You can always buy a small property today, then sell it or rent it out later. The investment income could be significant depending on location (Hello, cute studio apartment in your favorite neighborhood). Plus, you could keep your small city apartment as a “weekend property” after you move to the suburbs, then Air BnB it during the week! Have fun with it. Ownership is serious, but having options is always fun.
Option 2: Take Care of Your Needs
You can also buy a home that reflects your current needs or something just past them. If you have been living in a one-bedroom apartment since graduating college or share a flat, the idea would be to get something with two bedrooms or more. From condo to bungalow, having two bedrooms keeps it small (especially in price) but it gives you room to have a home office, a roommate, a nursery, or a guest room. Depending on your lifestyle, a mid-size home may be all you ever really need. If you decide to expand later, you can always sell and funnel that money into a larger property or rent it out and keep the asset.
Option 3: Plan to Grow
Of course, you can always go big. Buying a home can be an investment in your future. If you find the right house, at the right price, in the right neighborhood, why not plant your flag and lay your claim? While going from a flat share situation to a six-bedroom house may cost more than what you want to take on right away (in both cost and the work required to maintain it), there is nothing wrong with planning ahead for a large family or choosing to have a place where everyone can gather – as long as you can afford it. (We are looking at you, Ted Mosby)
Know Your Purchasing Options
Whichever buying option you choose, if you are like most people, you will need to finance your purchase. Saving up the money to buy a house outright takes a lot of time (or a major windfall, you lucky person you) and if you pay in cash, you miss out of some of the tax benefits of homeownership. Depending on your tax situation, it can really add up.
Let’s take a look at your lending options.
There are Different Types of Home Loans
Not all home loans are created the same. They don’t even have the same rules. For instance, fixed rate loans are normal installment loans. Like a car loan, you will have to pay $X every month for X years. In contrast, with adjustable rate mortgage loans, also called ARMs, you start off with one interest rate, then it can adjust after a number of years specified on your loan. Sometimes people with lousy credit opt for an ARM because the introductory period often offers a lower interest rate than a fixed rate loan does, but it is a gamble. If interest rates go up, so will your payments but if they go down, your payments go down too.
There are Different Loan Programs
There are also different loan programs out there. These make buying a home more affordable. For instance, you might be able to purchase a home with zero down payment if you are a veteran (through a VA loan) or if you live in a rural area (through a USDA loan). However, those programs can come with strict requirements and additional costs, such as mortgage insurance.
There are Different Lenders
While getting a home loan can involve a visit to your favorite bank, you also need to look at different lenders. You can find big differences in the interest rate offered as well as the origination fees and more. Banks and other financial institutions often run home loan specials to attract buyers like you. Many of them offer real bargains, but availability is limited. You will also want to shop around for another big reason – approval. Some lenders will be more willing to take a chance on a first-time home buyer, someone with less than stellar credit, or a smaller down payment.
Making the Right Decision for You
There is no best answer as to which option is best for you. It all depends on your goals, your financial situation, the amount of money you have saved, and the programs for which you can qualify. The best thing to do is to sit down and list it all out. You are going to need to gather your finances to apply for a home loan anyway. Why not run the numbers yourself first? Next, start shopping for a lender. Talk to your bank, but then branch out. You might be surprised how much money you can save by choosing a non-bank lender – like Ethos.
Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we have made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.