The process of buying a home is a lot like being pregnant for the first time. There's plenty of expectation and anticipation, roller coaster emotions, inspections to pass and a long waiting period before the final product is delivered. When the baby is placed in your arms - or the keys in your hand - the discomfort is behind you and your mind is finally at ease. Everything's alright, and you have a place to come home to.
There's no universal real estate equivalent of What to Expect When You're Expecting, but there are plenty of suggested books and online articles you can read to get started. Once you've found the perfect pad and read up on the basics of offers, escrow, home inspections and closing, it's time to think about your mortgage. Here are four of the most important questions to ask when financing your new home.
How much will I need for closing costs?
In a standard residential transaction, there are closing costs for both the buyer and seller. You can expect to pay between 2-5% of your new home's purchase price in closing costs, according to Zillow.com. That's in addition to your down payment, and it's a separate charge from the amount you pay for the home itself. Buyers are generally responsible for any fees related to their mortgage loan, while the sellers take care of title transfer fees, prorated taxes/utilities, and real estate agent commissions.
A buyer can, however, ask for the seller to pay some or all of their closing costs. The trick, notes real estate website homebuyinginstitute.com, is to figure out whether it's a buyer's market. If prices are relatively low and there are plenty of similar properties available in your market, then your offer can easily include a concession for closing costs. If multiple offers and bidding wars are common in your desired 'hood, you're taking a huge risk. Another option is to look into lender incentives that include cash back towards closing costs, such as Desert Financials' participating broker program.
How much of a down payment is required?
The answer will depend on your lender and loan type. The good news for today's home buyer is that the conventional mortgage with 20% down - the standard of previous generations - isn't your only option. Though lenders have recently moved away from "0% down" programs, with the exception of a few like the 100% VA Loan, there are plenty of programs out there that require as little as 3-4% down. Among them are FHA loans, Fannie Mae's HomeReady™ mortgage and the Conventional 97 loan. Don't be afraid to shop around for the best loan you can get, with a down payment you can afford (in cash) right now.
How much will my TOTAL monthly payment be?
There's nothing like getting through a seemingly endless morass of paperwork and twenty "sign and initial heres" only to discover that your monthly mortgage payment is nearly $500 more than you expected. That's exactly what happened to me. But after six months of searching, offers, back-and-forth negotiations, offers and counteroffers I was so worn down I didn't bother to protest. Six months later, I sold my house at a loss to get out from under that mortgage loan. When you apply for financing on your new house, be sure to request an estimated monthly payment that includes taxes and fees, mortgage insurance and any other extras that will be factored in. You probably won't see the exact figure until closing, but your lender/broker should be able to come close.
How does my mortgage work?
Understanding your mortgage loan is perhaps the trickiest part of the home buying process for newbies. Mortgage rates come in two types: fixed or adjustable. With a fixed rate mortgage, you pay the same monthly amount for the life of your loan - much like you do with a standard car loan. The interest rate of an adjustable rate mortgage, or ARM, changes periodically, with the possibility of a lower or higher rate in any given year. There are also hybrid loans which start off fixed and move to an adjustable rate. If you're willing to take the risk of higher rates later on, an ARM could start you off with a very low rate. If stability is essential, or you fear a large rate hike before you're ready to refinance your mortgage, you may be more comfortable with a fixed-rate mortgage. Also check your loan documents for any unexpected expenses such as a balloon payment prior to signing; shady lenders will sometimes hide massive payments in the tens of thousands of dollars to make it appear as if you're getting a better deal.
Like first-time parents, inexperienced home buyers are loaded with questions about how everything works. Do I need a real estate agent? How does a mortgage work? How long will the process take? The answer is different for each home buyer, depending on your situation. First-timers accounted for 35% of home sales in 2016 and 88% of buyers purchased their home with the help of an agent, according to statistics published by the National Association of Realtors®. So if you've never bought a home before or you've found a real estate agent, you're not alone. By doing your research and asking the right questions, you can ensure that you land the mortgage loan that's right for you.