To rent, or to own? That is the essential question. For couples thinking of moving, upgrading, or starting new together, that is.) If you’re seriously considering buying a home, the process can be daunting, stressful, and overwhelming especially for first-time homebuyers. To make the process a bit easier, we chatted with Kathy Cummings, Senior Vice President of Homeownership Solutions, Bank of America for her expert advice, and a crash course in Mortgages 101.
First Things First
Within the home buying process, many don’t even know where to begin. “The thought of buying a home is exciting, and many prospective buyers want to jump right into open houses and scouring real estate apps,” Cummings says. “Before falling in love with a home you can’t afford, make sure your finances are in order so you know realistically what you should be looking for.”
To make sure you have a grasp on your finances, budget, and an initial idea of what you can afford, she advises using a mortgage calculator which she notes can, “help you estimate your house budget given your income, debt, savings and other financial obligations.” Cummings also recommends working with a financial specialist “to get a clear picture of your overall financial health to avoid the home buying heartbreak.”
Just as with any major purchase, it’s important to have a clear vision of what you can comfortably and reasonably afford. Unfortunately for many, the difference between what you “can” borrow and what you “should” borrow is vast. Cummings recommends taking a reflective step back and asking yourself, “How much should I borrow?" instead of, "How much could I borrow?"
“This approach focuses on an amount that comfortably fits your budget,” she continues. “A general rule of thumb is to take whatever you earn each month before taxes and multiply that by 28%. This will give you an idea of how much a manageable monthly payment might be, including taxes, insurance and private mortgage insurance.”
What is a Mortgage?
A mortgage is simply (or not so simply, TBH) a loan that is taken out to facilitate the purchase of a home. But with the varying types, rates and companies that offer mortgages, where does one begin? First things first, it’s important to understand the different types of mortgages. Cummings describes the three basic types as fixed-rate mortgages, adjustable-rate mortgages (ARMs), and hybrid ARMs.
She explains that fixed-rate mortgages, “have a set interest rate for the life of the loan (typically 15 or 30 years), meaning your monthly payments of principal and interest will remain the same throughout,” while ARMs, “do not have a set interest rate, so it may change periodically during the loan term. This means your monthly payment could increase or decrease based on market conditions.” The third type, Hybrid ARMs, “are a combination of the two. They’re based on a 30-year term and typically start with an initial fixed-interest rate for a specific period of time (usually 5, 7 or 10 years). For example, a five-year ARM’s interest rate and monthly payments will stay the same for the first five years. But after that fifth year, the interest rate is subject to change annually for the remaining 25 years left on the mortgage based on the market.”
Aside from these, there other options too, that can be discussed and discovered by speaking with a mortgage professional.
The Good News
“While buying a home can involve some tough choices, it’s both financially and emotionally rewarding,” Cummings says, while sharing that based on Bank of America’s 2017 Homebuyer Insights Report, newly married couples are in good company when home buying. In fact, “79% (of people surveyed) report that homeownership has had a positive impact on their long-term financial picture,” and 95% of current homeowners feel proud of owning their own homes.
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