First Time Homebuyers

Education for the first time homebuyer

Lets face it buying a house is one of the biggest financial decisions you will ever make.  We are talking about hundreds of thousands of dollars and hundreds of thousands of dollars in interest over a 30 year loan.  So be smart!  Don’t jump the gun.

Cash is king.  There are some costs involved in buying a house for example, prepaid taxes, title search, home inspection and a lawyer to do the closing - just to name a few. Make sure that these expenses are not a stretch and that you have a comfortable amount of money for closing cost and a decent size down payment.  Make sure you have money left over in savings.  If something goes wrong after you bought the house and you don’t have money to solve the problem things can get sticky; i.e. furnace or hot water heater.

Look at the long term goal.  Pay off the house and have an asset.  Buy within your range so you can make sure the house gets paid off.  The interest adds up year after year.  Make sure you have enough of a down payment so that you only have to pay PMI for a little while or not at all. Saving money is tough but it’s the best way to keep your payment lower and pay that loan off as soon as possible.  A buyer will need to put down 20% to get a loan with no PMI.  A $200,000 loan with 20% down at 4.5% would give you a payment of approximately $810.70 a month.  That same loan with $10,000 down will give you a payment of $962.70 plus PMI.  The first loan has total interest paid after 30 years is $131,850 and the second scenario interest payments would equal $156,572.75.   

Change those loans to a 15 year and your interest rate will be better and you will see more savings overall.  If we assume a $200,000 purchase with 20% down a 15 year loan at 3.5% interest rate the payments are; $1,143.81.  Total interest over the life of the loan is $45,882.

The same $200,000 with $10,000 down payments will be $1358.28 plus PMI and total interest paid over the life of the loan is $54,485.  Would you rather pay $156K in interest or $46K?  Make sure the loan makes sense otherwise the whole investment is for not.

FICO score.  Pull your credit yourself and find out what your score is and do some work to get your score up.  It’s just a game and the higher your score the more money you will have in the long run.  You will get a better rate, and if you end up with PMI in your loan you will pay much less per month.

There are first time homebuyer programs out there CHFA and FHA programs.  They are designed to get you into homeownership.  They typically will be 3.5% down payment with an upfront PMI charge of 1.5% of the loan. The FHA loan carries a lifetime PMI with it.  Also the PMI is more expensive than it would be on a conventional loan. We offer the CHFA, FHA and even USDA loans for rural areas.  I like them for what they are.  They are an opportunity for some people to get into a home.  They are expensive loans to hold for 30 years.  I urge people to not become complacent with this loan, and make sure that you re-fi out of it and into a conventional loan.  Keep your credit score up and pay off the loan as soon as you can.

Michael Shea is a loan officer with NorthEast Financial in Middletown CT

860-788-7237

www.linkedin.com/pub/michael-shea/31/492/17b/