Buying and owning my own home is a dream come true. It’s a dream I never thought I would reach, but with hard work, financial sacrifices, and a little bit of pixie dust, my husband and I were able to get there. I know a lot of people who are growing up in Southern California right now feel the American dream of home ownership is unattainable. I know – I was right there with you! The key is to remember there is no set age or time you are supposed to buy a house, and small changes in your lifestyle can make a BIG difference in the long run. I’m excited to be partnering once again with Capital One, a bank I use and trust, to bring you these financial tips to get you closer to buying your first house. As someone who worked in the mortgage lending industry for several years, I have seen what you should and shouldn’t do when buying your first home. Hopefully some of these tips will help you reach your goals!
1. “The way to get started is to quit talking and begin doing.” When Walt Disney said this, he probably didn’t have financial planning in mind. But the quote still works for this purpose! The amount you require just for a down payment (20% of the home’s cost*) may seem completely overwhelming and unattainable. But I promise you, if you quit just talking about it and start saving, you will get there! Set aside a savings account just for your down payment. Even if you can only save $1, $5, or $10 a week, PLEASE just get started!!
*Some loans require less than 20% down payment, but I highly recommend staying away from these. You will be forced to purchase additional insurance until you’ve reached 20% equity, which helps the bank protect its investment. And removing the insurance can be a pain! It’s very tempting but don’t do it!
2. Crunch the numbers and figure out what you can afford. There are a couple quick and easy estimates to figure out what your home price range should be. The basic rule of thumb is to look at houses that are 2.5 times your annual salary. So if you are married and looking to purchase a house together, that’s 2.5 times your combined salary (as long as both of you are contributing financially). Also, your monthly payment shouldn’t be more than 28% of your monthly income. I prefer to be on the more conservative side and recommend not going above 25%. Don’t forget your monthly payment isn’t just your mortgage lender’s Principal and Interest. You also have to factor in homeowner’s insurance and property taxes. Capital One has a good mortgage calculator on their website if you want to play around with numbers.
3. Know your loan types. 30 year fixed, 15 year fixed, 5/1 ARM … WTH. I know, I know. What does it meeeeean? The mortgage loan type you choose depends on a variety of factors, including your budget, the amount you can afford to put down, the interest you’ll pay and the term length. I’ll break down some of the basics for you:
- 30 year fixed is the most popular and most “traditional” mortgage loan. It means you will be paying your loan for 30 years with a fixed interest rate. A 30 year fixed mortgage is good if you want the security of a fixed monthly payment and you plan to stay in your house for at least five years.
- 15 year fixed is for people who have more money to put towards their loan every month. It’s the same type of loan as the 30 year fixed, but you pay off the loan in half the time. A 15 year fixed mortgage is generally used by people who are refinancing their homes and can afford a higher monthly payment in exchange for paying off their mortgage quicker. It’s rare that a first time buyer opts for a 15 year fixed mortgage.
- A 5/1 ARM – Adjustable Rate Mortgage – means just that … your interest rate will adjust over time. This could work in your favor, or it could end up being very bad. With a 5/1 ARM, you will have a flat rate for five years, then adjust annually according to the current interest rate. An ARM mortgage is good for someone who doesn’t plan on owning their home more than five years, but beware – with an ARM you are putting less money towards principal and if the value of your house drops, you could find yourself “underwater,” meaning you owe the bank more than what the home is worth.
Because I am financially conservative, I always recommend a fixed mortgage. However, everyone should do their own research and figure out what type of mortgage is best for their situation.
4. Keep an eye on your credit score. Your credit history is KEY to getting the best loan & interest rate possible. Your mortgage lender will look at your credit history to weigh their financial risk when investing in you. If your credit history has some dings in it, start working NOW to correct them. What does that mean? Make sure you are making all payments on time, especially other loans such as car loans or student loans, and you are not collecting a lot of debt/interest on credit cards. Ideally you should be paying off your credit cards every month, or at least paying MORE than the minimum payment.
5. Financially prepare for emergencies. When saving for a home, you should always have a financial cushion for unexpected expenses. What if you or your partner loses their job, or if your car goes kaput and you need to buy a new one, or if spaceships come down and shoot laser beams through your roof? IT COULD HAPPEN. I wrote a whole post about maintaining an emergency fund, which is especially important for major purchases such as your first home.
6. Don’t sacrifice to the point of unhappiness. Remember the Budget Fairy Tale philosophy is all about spending your money wisely, not about saving as much money as possible. Set realistic goals that allow you to save money for your future home but still have fun once in a while! Even if it takes you a bit longer to get there, the roses that line the walkway to your front door will still smell as sweet!
Are you in the process of saving for your first home? Capital One‘s goal is to help first-time home buyers understand how the home loan process works, which is why they have launched a new online learning center that features the know-how you will need to become savvy homeowners. The Capital One Home Loans Online Neighborhood is a free online resource where you can learn all about home buying. You will find easy-to-understand articles and helpful videos, as well as information about Capital One’s Home Loans offerings. As I stated earlier, I have been banking with Capital One for years and I love that they are demystifying the complicated home loan process!
If you are hoping to buy your own home someday, I hope these financial tips have helped you out. Do you have any other home buying budget tips to share?
I was selected for this opportunity as a member of Clever Girls and the content and opinions expressed here are all my own.