Buying a home is an important part of both the American Dream and a successful financial future. The loan you take out to buy a home—your mortgage—will probably be the biggest and longest-lasting of your life, which makes it crucial that you understand the basics. From saving for a down payment to budgeting for maintenance, there's a lot more to buying a house than just plugging numbers into a mortgage calculator.
How do people buy a home?
A mortgage is the biggest loan most people will ever take out. There are strict lending requirements: You have to save up a lot of money of your own to contribute, and you need good credit and a good employment record to be approved for a mortgage.
A down payment is the cash you have saved.
A mortgage is the money you borrow.
How much money is required for a down payment?
Typically between 5 and 20 percent of what the house costs.
The more money you can put down, and the better your credit score, the better the terms of the mortgage you can get—a better interest rate and lower fees.
It’s how much you owe compared with how much you earn. That number gives lenders a sense of how much money you have left each month after paying your bills. They want to know that you can comfortably afford to pay back your mortgage.
To figure out your debt-to-income ratio, add up your monthly bills and then divide that number by how much you make each month before taxes are taken out.
The lower the number the better. Lenders want to see a ratio of .40 or less.
Fixed-rate v. adjustable-rate mortgages (ARMs)
The interest rate on a fixed-rate mortgage stays the same for the life of the loan, which is usually 30 years. That makes fixed-rate mortgages predictable and safer.
The interest rate on an ARM usually starts off lower than a fixed-rate mortgage, but can change after a pre-set amount of time. That makes ARMs riskier, but they can also be a good deal if used responsibly.
Refinancing means replacing your existing mortgage with a new one, usually at a lower interest rate.
“Hidden” homeownership costs
Just because you can afford the monthly payment doesn’t mean you’re ready to buy. You’ll need to budget for other costs, otherwise it would be like buying a car without making sure you can afford insurance and gas.
Property taxes can be hundreds of dollars a month, so they are tax deductible (an advantage of buying over renting).
Homeowners insurance runs anywhere from $50 to $100 a month or more.
Utilities, which include gas, oil, electricity, water and sewer, can add up to a couple hundred dollars a month depending on the time of year.
Maintenance costs each year average about 1 percent of purchase price per year on upkeep.
Condo fees, if applicable, can be another substantial cost.