Understanding Your Mortgage
Before you even start looking at houses, you need to figure out just how much you can afford, as well as the type of mortgage and interest rate that will best suit your needs. Believe it or not, there are hundreds of different kinds of home loans out there, and many of them are designed specifically for first-time buyers.
Types of Mortgages
Here are the four basic types of loans that are most popular amongst Philadelphia buyers.
Conventional Mortgage
This is a standard type of loan that most home buyers use if they can afford to put 10 to 20% down on a home. Interest rates can be fixed or adjustable, and the terms of the loan can vary depending on the lender.
FHA Mortgage
These loans often appeal to lower income or first-time buyers due to their low interest rate and downpayment options. However, these mortgages also require mortgage insurance to protect the lender, which could result in higher costs.
VA Mortgage
If you're an active duty, veteran, or retired member of the armed forces, you could be eligible for a VA mortgage. These loans offer both low interest rates and down payment requirements, and you won't need any mortgage insurance.
USDA Mortgage
If want to live in the outskirts of Philadelphia, check to see if a property is eligible for a USDA mortgage. This type of loan is targeted towards average income buyers moving to a low density area, and they also have lower interest rates.
What Do Mortgages Include?
Your mortgage payment contains four parts—you'll often see them abbreviated as "PITI." Here's what each letter means:
Principal
The repayment for the money you borrowed to purchase your home. This goes directly to the lender.
Interest
This is a payment you make to your lender for letting you borrow money, in addition to the initial amount you borrowed.
Taxes
Many lenders (and all FHA lenders) will lump your property taxes into your monthly mortgage payment.
Insurance
Your payment may also include homeowner's or mortgage insurance.
Shopping for the Right Loan
Shopping for a loan is kind of like searching for a house; you'll want to do plenty of research and explore all of your options before settling on "the one." You should meet with at least two different lenders to make sure you're getting the best deal, or have a mortgage broker do the shopping for you.
Be sure to consider interest rates, too—here are two of the most common options.
Fixed-rate mortgage
The interest rate on a fixed-rate mortgage will never change, so your monthly payments will always be the same. Buyers looking for stability and predictable payments often choose this type of mortgage.
Adjustable-rate mortgage
The interest rate on an adjustable-rate mortgage can start out low, but it fluctuates depending on the state of the market. This type of loan is somewhat unpredictable and could result in higher payments.
Calculating Your Monthly Budget
Now that you know all of the mortgage options available here in Philly, it's time to start crunching some numbers. You'll need to determine just how much you can afford every month before you start applying for loans. Typically, your mortgage payment shouldn't exceed 25% of your monthly take home pay.
Remember—home prices and interest rates can fluctuate every day. Make sure you're working with current information as you make your calculations!
Finding a Great Local Agent
“An agent can offer you a wealth of resources that can help make the entire process stress-free. And best of all, most buyers won't have to pay their agent's commission—that responsibility typically falls on the seller.
Your agent should be someone that's intimately familiar with your area of choice and knows how to help first-time buyers. You may also want to interview a few candidates before making your decision.
What Will I Pay Upfront?
Earnest money
This is like a security deposit that shows the seller you're serious about their home. If the sale goes through, the earnest money will cover your closing costs.
Down payment
This number can vary from 5% and up of a home’s price. This is the out-of-pocket amount that you're putting down to pay for your home.
Closing costs
These extra fees are typically low for buyers and cover the various expenses that come with finalizing a home purchase. They often include inspections, title charges, and legal fees.
Should You Get a Home Inspection?
If the seller accepts your offer, then it's time to move on to the home inspection. Even if you're buying a brand-new home, inspections can uncover issues that you may not be able to see at first glance. During the inspection, a certified expert will check over the interior and exterior of the house to check for any lingering issues.
Review your contract
Before you sign any paperwork, take some time to triple-check your contracts with your agent or lawyer present. They'll be able to answer any of your last minute questions.
Finalize your mortgage
This is when you'll submit your formal mortgage application, have your home appraised, and pay off any closing costs. However, it's not uncommon for the seller to pay a majority of the closing costs.
Pay, close, and get keys!
Meet with your agent to sign all of the paperwork, make your down payment, and tie up any remaining loose ends. Congrats—you're finally a homeowner!
Still Have Questions?
Buying your first home is no easy feat, so it's normal to have plenty of questions! Just reach out to the Sivel Group to learn more about real estate in the Greater Philadelphia area. We'd be happy to give you the answers you're looking for and help you find the home of your dreams.