Whew! Guys, what a relief. As I made my trip through memory lane while saying goodbye to our first home, I couldn't help but think about the home-buying process. I was a total newbie! There is SO much stuff we did differently this time around, now that we know the basics. I wish I had this post to read before we bought our first house - I hope you find it helpful!
What's in a house payment?
A house payment to your lender is interest on your loan and money towards your principal (amount you still owe). Often you also pay into escrow through your lender, too, which is your home insurance and property taxes. If you put down less than 20% for a downpayment, you will also pay PMI (mortgage insurance), until you reach 20% of the purchase price of the home.
You aren't paying off as much as you think.
When I first saw the breakout on our house payment, I couldn't believe how little was going towards the principal in the beginning - less than 25% of our payment! Of course, every payment you make means there is less money to charge interest on for the next month, so even with the same payment, more goes towards your principal, and less towards interest.
What is equity?
This might sound like a stupid question, but I did not have a full understanding of equity until we started making house payments. Equity is money that is yours (not a lender's), that is tied up in something, like your house or your car. A general formula is Value - Lender's share = Equity. Just because you put a dollar in doesn't mean you have equity - think about depreciation on a car. Maybe you've paid $10,000 over a few years, still owe $5000 to a lender, and it's only worth $5000. Value ($5000) - Lender's share ($5000) = $0 in equity. Understanding equity is crucial to financing anything.
Homes generally appreciate over time, have lower interest rates and longer terms than cars, so don't panic!
Shop around for lenders.
If you're going to be five or six figures in debt to someone, make sure you know who it is! We have used Quicken Loans for both our homes, and been incredibly pleased. The people are friendly, knowledgeable, very quick (even our realtor was very impressed with them), and extremely responsive. There's an online portal for all your paperwork, and you can use it after you've bought the house to pay online, etc. Because we used them for the second home purchase too, they gave us $1000 towards closing costs!
There was another bank we were considering, even with a slightly lower rate, but the guy was incredibly rude, never called me back when he said he would, and kept insulting Quicken (on the premise of they were "not even good enough to be his competition"). The only reason I kept talking to him was to get leverage for a lower interest rate with Quicken (they came down a quarter point!).
Lower your interest rate.
AKA, not all financing is the same. You probably already knew that, but I didn't when I was first buying! For our first home, we went with a 30-year conventional loan, because... well, because we didn't know any better. Although interest rates are low, there are ways to lower it even more by changing your financing method.
- 15 year conventional: Your monthly payment will be higher than a 30-year, but don't worry - it's not doubling! You can lower your interest rate by over a point doing this, and pay off your house in 15 years. It's worth checking out - your payment may not be as high as you think!
- 5/1 or 3/1 ARM: We have a 5/1 ARM now, which is an Adjustable Rate Mortgage. Our interest is low for the first five years (even lower than a 15-year), and it can be adjusted by up to a certain amount every year after that. Of course, there is some risk to this - your rate can go up - but if you're not planning on being in a house for very long or over-paying every month, this is a good way to reduce the amount going towards interest and adding to your principal. And if you end up staying for longer, you can always refinance if you don't think you're getting a fair rate.
There are other types out there too, like VA, FHA, etc. I'm not really sure how those work, but here is a good overview about them.
Shop around for insurance.
Home insurance can help you in the event of your home needing major repair, like from a tornado, hailstorm, someone driving through your house, etc. You have to provide your lender with this information before you close, and they pay the insurance for you... and you pay into escrow through the lender (so you pay it monthly with your house payment).
Just like car insurance, home insurance rates vary greatly between providers and states. Check if your car insurance company also carries home insurance - if they do, they'll likely give you a discount on your home or car insurance. But DO NOT STOP THERE! Get at least 2 other rates, too. For us here in the Southwest, we started with State Farm, saved $200 (a year) by switching to Homestead, and now have an even lower premium with more extensive coverage through Traveler's.
Make sure you know what is covered and how much your deductible is, so you're actually comparing apples to apples. Each state has their own minimum requirements, which is probably what the insurance company is quoting you. I think it's pretty standard to have $1000 deductible, and for any flooding to not be covered at all.
**Tip: Make sure to get a fire extinguisher - they're only $20 from Lowe's, but your premium will go down more than that!
Pay off as much as you can, as quick as you can.
I'm not saying empty your bank account, but I AM saying that every dollar you put in up front is worth more than every dollar you put in after that. For every dollar down or additional you make toward your principal, that is a dollar you never again pay interest on - you're building equity!
As an example, on our last house, we added about $60/month to our payment, so $1440 over the course of time we lived there. If we didn't do that anymore, and just paid the regular payment for the rest of the 30 year loan, we have still saved over $12,000 in interest, and paid it off 11 months early! And if we DID continue to add $60/month for the life of the loan... that saves $25,000 in interest, and it gets paid off in 24.5 years instead of 30. See what I mean here? That doesn't even include the interest you are GENERATING by having all that extra $ in your bank account!
Of course, maybe you have other ideas in mind, like investing, where your return on investment is greater than the interest you pay on your mortgage. In which case, good for you! Sounds like you've got a good handle on the finances.
Hope this has helped you a little bit! I still have a lot to learn, but I think I've come a loooong way since we bought 2 years ago. And please, if you have any more advice, let us all benefit by leaving it in the comments below! Thanks!
This is so helpful! I'll reference this post if I ever buy a house...
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