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Monthly Payment Distribution
Monthly Mortgage Payment Components:
The monthly mortgage payment is primarily derived from the following components:
- Loan Amount—The amount borrowed from the bank. This is usually the price of the home.
- Down Payment—The percentage of the loan amount that is paid upfront. This reduces the amount of money that is required to be paid back over time.
- Interest Rate—The interest rate of the loan.
- Loan Term—The amount of time over which the loan will be paid back. Usually 15 or 30 years (180 or 360 months).
- Annual Property Tax—Every property owner is required to pay a tax to the governing authorities. Although there may be slight variations across states, the average rate of annual property tax in the US is between 1-4% of the property value.
- Annual Home Insurance—It is an insurance policy that protects a homeowner from possible accidents to the property, although it may include personal liability coverage – a form of protection against lawsuits emanating from injuries sustained on and off the property. The lender will require the owner purchase home insurance. This will be included in the mortgage.
- Annual HOA Fee—The property owner is often required to pay a certain amount to an organization that oversees the maintenance and improvement of the neighborhood the home is located in. The value is usually less than 1% of the property value annually.
- Private Mortgage Insurance—It is an insurance policy that protects the mortgage lender if the borrower fails to repay the mortgage. It ranges from 0.3-1.5% of the loan amount annually, and the exact price depends on factors like the credit of the borrower, the size of the loan, and down payment. If a down payment of less than 20% is made, then PMI will be added to your mortgage payment.
How to Prepare for Buying a House
Buying a home is huge. It’s one of the biggest challenges you’ll face in life. There is plenty of worries, stress and unknown that can scare off first-time buyers. Some home buyers don’t even make the steps necessary to purchase a home out of fear. But there are options and ways to prepare yourself for this milestone. Tackle this goal in the most organized way possible and follow these tips below:
Calculate Your Monthly Mortgage Payment
We’re talking credit scores! It’s time to take a cold, hard look at your financial health to really know if buying a home is the right move for you. There is nothing worse than rushing into a loan and then struggling to make your payments.
Credit scores are an important factor in considering your mortgage interest rate. They showcase your worthiness and reflect your borrowing history. High credit scores mean a lower rate, which ends up saving you money over the course of your loan.
If you’re score is not where it should be for home-buying, then take some time to fix it! Practice good financial habits and make payments on time. Consider purchasing your home when it has improved to really get started on the right foot.
Save for a Down Payment
This is one of the most challenging parts of preparation. To buy your home you’ll need a down payment of around 3.5 to 20% of the purchase price.
You’ll want to really save as much as possible. Expenses can add up and the higher your down payment, the lower you’ll pay each month. It can take time to get to your goal but accelerate the process by cutting back wherever you can. If you have debt, pay it off as soon as you can and put that money towards your fund when your debt-free.
Get Pre-approved Before You Shop
If you made it this far then you probably feel ready to buy. The confidence is good, but now you’ll need to secure the funds for your home and really look at how much home you can afford.
Pre-approval means you’ve completed a mortgage application that will look at your ENTIRE financial existence. Think: your income, debt and credit history. This information tells the lenders just how much you can afford. There is no point in looking at million-dollar homes when you’re only approved for $200,00.
Looking for a lender can be a task on its own. Make sure you do your research here and really shop around. Compare banks, credit unions, interest rates, fees, application fees, and terms. If this overwhelms you, consider working with a mortgage broker to help find your best option.
Find an Agent
Real estate agents can be a vital resource for finding a home. No one knows the area better and they’ll always look for the best interest rate. They want to get you into a home and make a sale. Real estate agents make commission after a home is sold, so you don’t have to worry about costs right away.
Just like any other step in this process- do your research. Really take the time to find a great realtor. Look at realtors with a proven track record and excellent reviews. Even contacting their former clients can help determine if they’ll be a great fit.
Make a Plan B
This article is mainly about preparing yourself for a successful home-buying endeavor, but sometimes things just don’t work out. In the case that you experience a set-back, start thinking about a plan B. You will face difficult challenges throughout this process but it’s important to remember how these choices will impact your future. Don’t rush into something if it’s not the right time or not the right terms.