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LESSON CONTENTS
Home purchase price
The home purchase price is what you pay to purchase the home. You can look at listings for homes for sale in your neighborhood to get a rough estimate. Housing prices are also subject to change at a moment’s notice based on supply and demand. Consider postponing a purchase if prices are too high and you expect them to go down in the future.
Interest rate
The interest rate is what you pay on the money you borrow to buy the home. It is usually listed as an annual percentage rate (APR). Reach out to various financial institutions in your area to begin the preapproval process and compare the interest rates to save as much money as possible.
Your interest rate is based on your credit history and the federal funds rate set by the Federal Reserve. Interest rates will be higher during inflation, so consider waiting until rates go back down. You can also refinance your mortgage once rates go down if you expect home prices to rise. If your credit score is low, you can also work on building up your score to lock in a lower interest rate.
Loan term (years)
The loan term is the length of the repayment period, usually listed in years. You have between 15 to 30 years to pay off the mortgage by making regular monthly payments. The longer the loan term, the lower your monthly payment, but you will pay more in interest over the length of the loan. You can always pay more than the required amount every month to pay off your mortgage before the loan term expires to save on interest.
Down payment
The down payment is how much you initially invest in the home. It is represented as a percentage of the total home purchase price. You must determine how much you can afford to spend upfront when buying a home to borrow less money from the bank. The larger your down payment, the less you will have to pay in interest. You may want to wait to apply for a mortgage until you have a large amount of savings in the bank. Each lender has their own minimum down payment requirements as well.
Annual home insurance
Annual home insurance is how much you will pay in home insurance every year. You must have homeowners insurance to protect your property from damage. The price of home insurance ranges based on a number of factors, including where you live, the size and value of your home and the extent of your policy coverage. Locate your policy or research the average cost of policies in your area to find your monthly insurance premium. Multiply that number by 12 to get the annual amount.
Annual property tax
The annual property tax is how much you pay in property taxes to live in the home. All homeowners must pay property taxes. But the rate will vary based on the size and value of your home and where you live. East and west coast states typically have higher property taxes than those in the middle of the country.
Monthly HOA dues
Depending on where you live, you may also have to pay monthly homeowner’s association (HOA) fees to own the property. HOAs are typical in suburban communities where homes look similar. The properties may have a good location, but you must follow the HOA rules. You can avoid paying HOA dues by buying property in a non-HOA community.
Monthly mortgage insurance
If your down payment is less than 20%of the home purchase price, you need to pay for private mortgage insurance (PMI), which is designed to protect the lender should you default on the loan. The cost usually ranges from 1% to 3% of the total loan amount per year. You can avoid paying PMI by saving up for a 20% down payment or larger.
Don’t forget that buying a home can include additional costs such as closing costs, which range from 3% to 6% of the total home price, realtor fees, housing inspections and moving costs. Ensure you are financially prepared to own a home in your area before you fall for the house of your dreams.