1. Avoid the worst mortgages for first-time home buyers.
A huge benefit to being a first-time home buyer is that you’ve never fallen for an awful mortgage—and you don’t have to!
Many first-time home-buyer loans only make you put a little money down, but they cost tens of thousands of dollars morein the long run. Don’t fall for it! Remember—if it seems like a good deal for you right now, then it’s an even better deal for your lender in the end.
Avoid these low-to-no down payment mortgage options:
- Adjustable-Rate Mortgages (ARMs): ARMs suck you in with a low initial interest rate. But then, your lender raises your rate, and your mortgage payment goes up. No, thanks!
- Federal Housing Administration (FHA) Loans: FHA Loans are popular for first-time home buyers because you can put as little as 3.5% down. But you waste thousands of dollars on mortgage insurance (similar to PMI) for the life of the loan.
- Veterans Affairs (VA) Loans: VA loans let veterans buy homes with no down payment or PMI. But they carry a bunch of fees and usually charge high interest rates.
2. Know the best mortgage for first-time home buyers.
I only recommend 15-year fixed-rate conventional mortgages. Here’s why:
- Quicker payoff time – With 15-year loans, the monthly payments are higher than 30-year loans. But you’ll pay off your mortgage in half the time. Plus, most 15-year loans have a lower interest rate, saving you tons of money.
- Locked-in interest rate – A fixed-rate loankeeps your interest rate the same over the life of the loan, so you pay less interest and always know what to expect.
How a 30-Year Mortgage Compares
I’ll just say it: 30-year mortgages may have a lower monthly payment, but they cost more in the long run. Like tens of thousands of dollars more.
Imagine you want a $300,000 house with 20% down. You need a mortgage for $240,000. Even if the 30-year loan and the 15-year loan offered the same interest rate (unlikely, since 30-year rates are almost always higher), the 30-year mortgage still costs more.
15-Year at 4.5% | 30-Year at 4.5% | |
Number of Payments | 180 | 360 |
Monthly Payment | $2,181 | $1,562 |
Total Interest Paid | $90,447 | $197,778 |
Total Amount Paid | $330,447 | $437,778 |
You’ll save $107,331 with a 15-year fixed-rate mortgage—and you’ll be payment-free 15 years sooner. I mean, hello!
3. Pick a lender you’re comfortable with.
Some lenders onlycare about profits, while others actually care about helping you become a homeowner. Talk to at least three lenders. Compare their interest rates, fees and customer service to find the best one for your finances and peace of mind.
If you’re debt-free like me, you need a lender whodoesn’t require a credit score. (Because you don’t have one anymore—yay!) So look for one who does manual underwriting.
4. Get preapproved for a loan before house hunting.
It pays to get preapproved for a loan (not just prequalified). Preapproval is when your lender verifies your financial information and gives you a letter saying how much money you can borrow.
Preapproval shows sellers you’re serious, and you can use your letter to get ahead in a competitive market.
Just know some lenders may preapprove you for a bigger loan than you can afford. But you don’t have to borrow that much—or look at houses that are too expensive!
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