Financing a Home Without Busting Your Budget

Reviewed Aug 15, 2016

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Summary

  • Make sure you can live within a budget.
  • Look at your own record as a borrower.
  • Know all the costs.
  • Learn about loans.

Let’s say you want to put down roots, say goodbye to landlords, and start taking the mortgage-interest tax deduction—in short, you want to buy a home. Now can you afford it?

The answer to that question is multifaceted. It depends in part on the real-estate market and interest rates, two factors outside your control. But you can still do a lot to bring the prize of home ownership within reach.

Here are some tips from home finance experts on financing a home without getting in over your head:

  • Get your own financial house in order. Before you consider buying a home, you have to make sure you can live within a budget. (It’s a good sign if you’ve been able to save enough for a full down payment—20 percent of the price—out of your own regular income). Look at your own record as a borrower. Have you been able to pay bills on time? Do you have a reliable source of income? You’ll need it.
  • Know all the costs. The cost of a home is not just the down payment and monthly payments on your mortgage. It also includes “closing” costs at the time of purchase (typically several thousand dollars), annual property taxes, insurance, and upkeep. Taxes are typically 1.5 percent, sometimes much more. As for maintenance, Eric Tyson and Ray Brown, in their book Home Buying for Dummies, say you should figure on spending an average of one percent of the home’s purchase price yearly.
  • Learn the ropes. The huge variety of loans—fixed-rate, adjustable-rate, hybrid, conforming, jumbo, government-sponsored—can be bewildering. But you can make this marketplace work for you if you educate yourself. “You really need to understand the available products, you need to understand the process, and you need to understand what lenders want from you,” says Tom Steinmetz, a mortgage industry veteran and author of The Mortgage Kit. If you want to see yourself as lenders see you, first get your free annual credit report. Then, you can continue to purchase copies of your credit report and score, along with advice on how to improve it (see Resources below).
  • Stay focused, but shop around. Steinmetz urges would-be homebuyers to decide first on a specific type of loan (like a 30-year fixed rate instead of an ARM), then canvass lenders and brokers to find out which one offers the best rates. Focusing tightly on a particular product keeps you from getting tangled up in apples-and-oranges comparisons. And don’t forget to ask your real estate agent about federal, state, and local programs aimed at helping first-time homebuyers. Steinmetz says there are plenty of these, and you may qualify.
  • Shop for a loan that fits your personality and plans. Should you go fixed-rate or variable? That depends, at least in part, on your attitude toward risk. With variable loans (such as ARMs), you assume more risk from interest-rate fluctuations but you get a lower rate, at least initially, in return. A fixed-rate loan gives you more security, and it may also save you money if you’re borrowing at a time when rates are near historic lows.
  • Be ready to negotiate. Rates and other loan provisions aren’t set in stone. If you’re working with one lender or broker and you’ve found that another one offers the same product for a quarter-point less, don’t be afraid to ask for a lower rate. Loan officers have some flexibility, Steinmetz says.
  • Be skeptical of “no points” deals. “Points” are simply an extra interest charge tacked on by lenders at the point of purchase. You can get loans without them, but there’s a catch—the interest rate is invariably higher. For the average buyer, who stays for about seven years, it’s usually worthwhile to take the lower interest instead. “Look at that horizon,” says Newport Beach, CA, Mortgage Broker and Author Randy Johnson. The longer you hold the mortgage, he says, the more the interest-rate break outweighs the points.

Resources

Fannie Mae
www.fanniemae.com

Freddie Mac
www.freddiemac.com/homeownership

Mortgage Professor
www.mtgprofessor.com

A good site for comparing the offerings of many lenders, specific to your state or region, is Bankrate.com, at www.bankrate.com. Select “Mortgage” on the home page.

Home Buying for Dummies, sixth edition, by Eric Tyson and Ray Brown. For Dummies, 2016.

Learn how to get a copy of your free annual credit report at the Federal Trade Commission website (www.ftc.gov/faq/consumer-protection/get-my-free-credit-report).

At MyFICO (www.myFICO.com) you can buy a credit report with your credit score.

By Tom Gray
Source: Home Buying for Dummies, second edition, by Eric Tyson and Ray Brown. For Dummies, 2001; The Mortgage Kit, fifth edition, by Tom Steinmetz. Dearborn Publishing, 2002.

Summary

  • Make sure you can live within a budget.
  • Look at your own record as a borrower.
  • Know all the costs.
  • Learn about loans.

Let’s say you want to put down roots, say goodbye to landlords, and start taking the mortgage-interest tax deduction—in short, you want to buy a home. Now can you afford it?

The answer to that question is multifaceted. It depends in part on the real-estate market and interest rates, two factors outside your control. But you can still do a lot to bring the prize of home ownership within reach.

Here are some tips from home finance experts on financing a home without getting in over your head:

  • Get your own financial house in order. Before you consider buying a home, you have to make sure you can live within a budget. (It’s a good sign if you’ve been able to save enough for a full down payment—20 percent of the price—out of your own regular income). Look at your own record as a borrower. Have you been able to pay bills on time? Do you have a reliable source of income? You’ll need it.
  • Know all the costs. The cost of a home is not just the down payment and monthly payments on your mortgage. It also includes “closing” costs at the time of purchase (typically several thousand dollars), annual property taxes, insurance, and upkeep. Taxes are typically 1.5 percent, sometimes much more. As for maintenance, Eric Tyson and Ray Brown, in their book Home Buying for Dummies, say you should figure on spending an average of one percent of the home’s purchase price yearly.
  • Learn the ropes. The huge variety of loans—fixed-rate, adjustable-rate, hybrid, conforming, jumbo, government-sponsored—can be bewildering. But you can make this marketplace work for you if you educate yourself. “You really need to understand the available products, you need to understand the process, and you need to understand what lenders want from you,” says Tom Steinmetz, a mortgage industry veteran and author of The Mortgage Kit. If you want to see yourself as lenders see you, first get your free annual credit report. Then, you can continue to purchase copies of your credit report and score, along with advice on how to improve it (see Resources below).
  • Stay focused, but shop around. Steinmetz urges would-be homebuyers to decide first on a specific type of loan (like a 30-year fixed rate instead of an ARM), then canvass lenders and brokers to find out which one offers the best rates. Focusing tightly on a particular product keeps you from getting tangled up in apples-and-oranges comparisons. And don’t forget to ask your real estate agent about federal, state, and local programs aimed at helping first-time homebuyers. Steinmetz says there are plenty of these, and you may qualify.
  • Shop for a loan that fits your personality and plans. Should you go fixed-rate or variable? That depends, at least in part, on your attitude toward risk. With variable loans (such as ARMs), you assume more risk from interest-rate fluctuations but you get a lower rate, at least initially, in return. A fixed-rate loan gives you more security, and it may also save you money if you’re borrowing at a time when rates are near historic lows.
  • Be ready to negotiate. Rates and other loan provisions aren’t set in stone. If you’re working with one lender or broker and you’ve found that another one offers the same product for a quarter-point less, don’t be afraid to ask for a lower rate. Loan officers have some flexibility, Steinmetz says.
  • Be skeptical of “no points” deals. “Points” are simply an extra interest charge tacked on by lenders at the point of purchase. You can get loans without them, but there’s a catch—the interest rate is invariably higher. For the average buyer, who stays for about seven years, it’s usually worthwhile to take the lower interest instead. “Look at that horizon,” says Newport Beach, CA, Mortgage Broker and Author Randy Johnson. The longer you hold the mortgage, he says, the more the interest-rate break outweighs the points.

Resources

Fannie Mae
www.fanniemae.com

Freddie Mac
www.freddiemac.com/homeownership

Mortgage Professor
www.mtgprofessor.com

A good site for comparing the offerings of many lenders, specific to your state or region, is Bankrate.com, at www.bankrate.com. Select “Mortgage” on the home page.

Home Buying for Dummies, sixth edition, by Eric Tyson and Ray Brown. For Dummies, 2016.

Learn how to get a copy of your free annual credit report at the Federal Trade Commission website (www.ftc.gov/faq/consumer-protection/get-my-free-credit-report).

At MyFICO (www.myFICO.com) you can buy a credit report with your credit score.

By Tom Gray
Source: Home Buying for Dummies, second edition, by Eric Tyson and Ray Brown. For Dummies, 2001; The Mortgage Kit, fifth edition, by Tom Steinmetz. Dearborn Publishing, 2002.

Summary

  • Make sure you can live within a budget.
  • Look at your own record as a borrower.
  • Know all the costs.
  • Learn about loans.

Let’s say you want to put down roots, say goodbye to landlords, and start taking the mortgage-interest tax deduction—in short, you want to buy a home. Now can you afford it?

The answer to that question is multifaceted. It depends in part on the real-estate market and interest rates, two factors outside your control. But you can still do a lot to bring the prize of home ownership within reach.

Here are some tips from home finance experts on financing a home without getting in over your head:

  • Get your own financial house in order. Before you consider buying a home, you have to make sure you can live within a budget. (It’s a good sign if you’ve been able to save enough for a full down payment—20 percent of the price—out of your own regular income). Look at your own record as a borrower. Have you been able to pay bills on time? Do you have a reliable source of income? You’ll need it.
  • Know all the costs. The cost of a home is not just the down payment and monthly payments on your mortgage. It also includes “closing” costs at the time of purchase (typically several thousand dollars), annual property taxes, insurance, and upkeep. Taxes are typically 1.5 percent, sometimes much more. As for maintenance, Eric Tyson and Ray Brown, in their book Home Buying for Dummies, say you should figure on spending an average of one percent of the home’s purchase price yearly.
  • Learn the ropes. The huge variety of loans—fixed-rate, adjustable-rate, hybrid, conforming, jumbo, government-sponsored—can be bewildering. But you can make this marketplace work for you if you educate yourself. “You really need to understand the available products, you need to understand the process, and you need to understand what lenders want from you,” says Tom Steinmetz, a mortgage industry veteran and author of The Mortgage Kit. If you want to see yourself as lenders see you, first get your free annual credit report. Then, you can continue to purchase copies of your credit report and score, along with advice on how to improve it (see Resources below).
  • Stay focused, but shop around. Steinmetz urges would-be homebuyers to decide first on a specific type of loan (like a 30-year fixed rate instead of an ARM), then canvass lenders and brokers to find out which one offers the best rates. Focusing tightly on a particular product keeps you from getting tangled up in apples-and-oranges comparisons. And don’t forget to ask your real estate agent about federal, state, and local programs aimed at helping first-time homebuyers. Steinmetz says there are plenty of these, and you may qualify.
  • Shop for a loan that fits your personality and plans. Should you go fixed-rate or variable? That depends, at least in part, on your attitude toward risk. With variable loans (such as ARMs), you assume more risk from interest-rate fluctuations but you get a lower rate, at least initially, in return. A fixed-rate loan gives you more security, and it may also save you money if you’re borrowing at a time when rates are near historic lows.
  • Be ready to negotiate. Rates and other loan provisions aren’t set in stone. If you’re working with one lender or broker and you’ve found that another one offers the same product for a quarter-point less, don’t be afraid to ask for a lower rate. Loan officers have some flexibility, Steinmetz says.
  • Be skeptical of “no points” deals. “Points” are simply an extra interest charge tacked on by lenders at the point of purchase. You can get loans without them, but there’s a catch—the interest rate is invariably higher. For the average buyer, who stays for about seven years, it’s usually worthwhile to take the lower interest instead. “Look at that horizon,” says Newport Beach, CA, Mortgage Broker and Author Randy Johnson. The longer you hold the mortgage, he says, the more the interest-rate break outweighs the points.

Resources

Fannie Mae
www.fanniemae.com

Freddie Mac
www.freddiemac.com/homeownership

Mortgage Professor
www.mtgprofessor.com

A good site for comparing the offerings of many lenders, specific to your state or region, is Bankrate.com, at www.bankrate.com. Select “Mortgage” on the home page.

Home Buying for Dummies, sixth edition, by Eric Tyson and Ray Brown. For Dummies, 2016.

Learn how to get a copy of your free annual credit report at the Federal Trade Commission website (www.ftc.gov/faq/consumer-protection/get-my-free-credit-report).

At MyFICO (www.myFICO.com) you can buy a credit report with your credit score.

By Tom Gray
Source: Home Buying for Dummies, second edition, by Eric Tyson and Ray Brown. For Dummies, 2001; The Mortgage Kit, fifth edition, by Tom Steinmetz. Dearborn Publishing, 2002.

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