The biggest challenge for most first-time home buyers is saving up enough money for a down payment especially in markets like San Francisco and New York City, where home prices have soared over the last few years. But thanks to a growing assortment of financing options, it's increasingly possible to find mortgages for as much as 97% of a home's value. In other words, you could put down as little as $5,514 for a home that costs $183,800, the national median in 2004, according to the National Association of Realtors.
How Much Can You Afford? The answer to that is a function of two things: How much you can borrow and how much of a down payment you can muster. As a rule of thumb, your annual mortgage payment, taxes and home owner's insurance shouldn't exceed 28% of your gross income. Then determine how much cash you have for a down payment, leaving yourself enough left over to pay those pesky closing costs, which can add up to 3% to 5% of your total home's value (plus a little something extra for emergency repairs once you move into your new home).
It is very important for a first time home buyer to get the right type of loan. Some loans can be pretty expensive and it is sometime difficult to determine the actual cost of a loan, especially for a first time home buyer.
Mortgage loans can either be a fixed rate loan or a variable rate loan. A fixed rate loan offers the same interest rate and payment rate every month. With a fixed rate loan, you will always know how much you will need to pay every month and you will know when you have already accomplished all of your loan payments. With a variable rate loan, you can start with a lower interest rate as well as a lower monthly payment. However, your interest rate and your monthly payment amount can change several times over the lifetime of your loan. Usually, this amount is tied up to a financial index like the U.S. Treasury Securities index.
There's no income limit to qualify for an FHA-insured loan. However, since these loans are geared toward helping first-time home buyers and low- to moderate-income families, there's a limit to how much you can borrow. The amount varies from region to region, but it's capped at $290,319 in high-cost areas ($403,750 in Hawaii), says Laurie Maggiano, a HUD spokeswoman. To check your area's ceiling
A mortgage will cover several expenses such as the principal payment, the interest, the home insurance and the city or county taxes that are due for the home. Usually, a mortgage loan can last for 30 years. There are also mortgage loans that only last for 15 years. It is important to note that the shorter the lifetime of a loan is, the higher will be the payments required.
With mortgage loans, it is common to be paying more in terms of interest than principal. Usually, you will be paying around two to three times more in terms of interest than you will be with your principal amount. The first few years of loan payment you will be making will usually be for the interest rate of the loan while the last few payments will be for the principal amount.
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