Personal Finance 101: Mortgage Tips for New Homeowners

Buying a new home is both exciting and overwhelming. In hot real estate markets, it may be tempting to make an impulsive decision that leads you to spending more than you anticipated.

The last thing you want is to purchase a home that you’ll be paying off well into retirement.

If you’re buying your first home, use these mortgage tips to ensure that your home is a blessing and not a burden.

Pay Off All Debt and Build an Emergency Fund

Before you take on the burden of a mortgage, it’s important to have all of your ducks in a row. This means paying off all of your debt, and building up an emergency fund.

Owning a home is expensive primarily because you’re responsible for the upkeep of the home. You need to be prepared for unexpected costs.

Your emergency fund should consist of at least three to six months of expenses to start.

If you purchase a home with no other debt (aside from the mortgage) and an emergency fund in place, you’ll be better prepared for any major expenses that may come your way.

Determine How Much House You Can Afford

Once you’ve paid off your debt and built up your savings, you can sit down and determine how much house you can afford.

The mortgage isn’t the only house-related expense. You must also consider taxes, insurance and HOA fees (where applicable). Your monthly housing costs should not be more than 25% of your monthly take-home pay.

Keep in mind that lenders will also be looking at your debt-to-income ratios, which will impact your ability to get a mortgage. If your expenses are too high, lenders won’t extend a mortgage to you.

“Mortgage lenders usually have strict debt-to-income ratios, which helps them determine if you can afford to make the new mortgage payment regularly,” says Scott Langdon of MoneyTaskForce.com. “The debt-to-income ratio is calculated by dividing your monthly debt payments by your gross monthly income.”

Save for a Down Payment

If buying a home with cash is not a possibility, it’s important to save for a down payment of at least 20%. A 20% down payment means that you won’t have to pay for private mortgage insurance (PMI) – if you’re getting a conventional loan.

PMI is usually 1% of the total loan value, and it’s factored into your monthly payment.

When shopping for mortgages, you’ll find that you have a lot of options.

• 15-year and 30-year mortgages
• Fixed-rate, adjustable-rate (ARM) and unconventional loans

A fixed-rate mortgage will lock in an interest rate for the entirety of the loan, so your monthly payments will be the same every single month. Conventional, fixed-rate mortgages are generally recommended by financial experts because they offer predictable monthly payments.

Don’t Forget Closing Costs

Many first-time homebuyers forget about closing costs, which equates to 3%-4% of the home’s purchase price. The lender will provide you with information on closing costs.

These closing costs will need to be paid in addition to your down payment.