As the nation continues to recover from the financial crisis, more and more Americans are taking on new financial burdens — increasing obligations to credit cards, auto loans and mortgages. This may be a sign of a recovering economy, but are most consumers financially really prepared to take on these commitments? April is National Financial Literacy Month, and as more consumers consider stepping into the real estate market, it's the perfect time to take a look at how a mortgage and the associated costs of owning a home match your financial profile.
According to the Federal Reserve Bank of New York's quarterly report on Household Debt and Credit, mortgages make up the largest component of household debt. Mortgage balances stood at $8.17 trillion this past fourth quarter, nearly 70 percent of the total aggregate household debt balances of $11.83 trillion. Mortgage originations continue to increase, signaling more movement in the real estate market, particularly among the millennial generation now eager to become first-time homeowners.
But in doing something for the first time there's a lot to learn, and many are unaware of all the financial aspects involved in buying a home. For example, according to a recent survey by ClosingCorp, roughly two thirds of millennials who plan to buy a home didn't know about closing costs, that can be anywhere from 2 percent and 5 percent of the total purchase price of a home.
If you are looking for that first home in this favorable interest climate, the following tips may help navigate the maze around buying a home:
Learn the myriad of costs associated with buying a home beyond the down payment such as closing costs, escrow and title fees, mortgage insurance premiums, realtor fees, and any costs for repairs and renovations.
Take an unflinching look at your budget. How will you cover a monthly mortgage payment? Get your finances organized, and set a realistic budget for your monthly mortgage and associated home expenditures. Plan a contingency fund for unexpected expenses.
Get your credit score. With your score in hand, you can test-drive appropriate loan options with various lenders to learn what products are available to meet your needs.
Don't try to buy more than you can afford. Many lenders offer budgeting tools on their websites; use them. You'll learn the loan amount for which you may qualify, and it will help make sure your eyes are not bigger than your wallet.
Study the current mortgage and real estate landscape. Look at multiple lenders and products. Get up to speed on current interest rates, loans types and the variations in the cost of homes where you wish to live.
Enlist the help of a trusted advisor. Buying a home and securing a mortgage are complex transactions, and we all need a little help. Talk to a peer who has bought a home recently or who is well versed in real estate. This can be a family member, financial planner or friend, but getting an outside voice can be invaluable.
Understand all the additional costs for which you'll be responsible. What kind of shape is the home in? Are there homeowners' association (HOA) fees? Before signing on the dotted line, get a home inspection and make sure that you know about any fixes that need to be made to the home.
Once you've taken a close look at all the financial considerations that go into buying a home and you're prepared to move ahead, be ready to make a firm offer. Create a close bond with your real estate agent, and stay connected during the negotiation process to close the deal.
A home is often the largest investment you will make, so be sure you understand how it fits into your overall financial health.