Buying a house is a life-changing process that requires lots of upfront financial planning.
When looking for a home, keep certain factors in mind, including your financial situation, types of available loans, your credit score, the price of the house and your down payment so you can navigate the process smoothly.
1. Your financial situation
Before you buy a house, make sure that your monthly budget can handle such a large expense. Unless you’re one of the few people who can pay cash for a home, you’ll likely be paying it off for 15 or 30 years, depending on the length of your loan.
In addition to the mortgage payment, you’ll want to factor in expenses like property taxes, homeowners insurance, property taxes and routine maintenance.
Use Bankrate’s calculator to see how much house you can afford and estimate the mortgage amount that fits your budget.
2. Types of mortgages
When buying a home, you have a few options for the type of loan you want to use. Two of the most common mortgage types are fixed-rate and adjustable-rate mortgages.
Fixed-rate mortgage: The interest rate on a fixed-rate mortgage stays the same over the life of the loan, with payments divided up into equal amounts that you pay on a monthly basis. The longer the loan term, the less you have to pay each month. However, you’ll likely pay more in interest than you would with a shorter-term loan.
Adjustable-rate mortgage: An adjustable-rate mortgage, or ARM, has a fixed interest rate for an initial period, followed by a period when the lender may periodically adjust the interest rate. For example, a 5/1 ARM has an introductory rate of five years. After that five-year period, the interest rate can change annually. With an ARM, you need to consider how much your monthly payment could increase and your ability to pay if it does go up.
3. Your credit score
You also need to review your credit score before buying a house. Your credit score helps creditors determine your creditworthiness. Borrowers with credit scores of 740 or higher generally qualify for the best mortgage deals.
It’s still possible to buy a house if you have bad credit. You likely will have to accept a higher interest rate on your mortgage, which could cost you hundreds of dollars extra per month.
If your credit score drops too low, though, you might not qualify for a mortgage at all. Consider improving your credit score first before trying to buy a house. You can check your credit report and score for free at myBankrate.
4. The price of the home
The higher the price of the house you want to buy, the more you can expect to pay on a monthly basis. When looking at houses, consider your budget and how much you can afford to spend.
Remember to consider your needs, too. Do you have a new addition to the family and need the room? Have your kids moved out and you want a smaller home?
Also, take a look at the price range of the houses available in the area where you want to buy. Compare the prices you find to your budget and determine what home you can afford.
5. The down payment
A large down payment represents one way to reduce the monthly cost of your mortgage. As a matter of fact, a down payment of 20 percent gives you access to better interest rates and prevents you from having to pay private mortgage insurance. So, in addition to lowering the amount you owe initially, a down payment also can get you a lower interest rate, making a house more affordable.
There are also mortgages that require no down payment or a small one.