Buying your first home – while you still have college debt

Posted by Casandra Properties on Tuesday, October 23rd, 2018 at 12:26pm.

You’re young, possibly in love, settling down and looking forward to the Great American Dream of owning your own home. But then reality hits: As a millennial, you face some bigger challenges than your parents did.

Home prices in the New York metropolitan area are high – and keep increasing. Salaries for younger employees often remain stagnant. And perhaps the biggest downer is that damn student loan which takes big bucks out of your monthly paycheck.

Let’s say you are working with a real estate agent and find the perfect starter home. Your agent can help you find a mortgage broker, or you can search on your own through banks and mortgage agencies. Your financial qualifications will be examined, including:

  1.    Do you pre-qualify for a mortgage?
  2.    Will your credit score be sufficient to obtain a mortgage?
  3.    Do you have enough money saved for a down payment?
  4.    Can you make the monthly payments?
  5.    Can you afford the maintenance costs of owning a house?

Once these details are compiled, some common types of mortgages may be up for review, including:

Conventional 30 Year Fixed Mortgage: This is one of the most popular mortgages for first-time home buyers, but it leads to the most interest being paid over the lifetime of the mortgage. Interest rates are also typically higher. With a fixed-rate mortgage, it’s so important to pay extra every month or to make an extra payment every few months if you can afford it. The monthly payments are lower, but you’re paying mostly interest for the first 10 years of the mortgage. Down payments for 30-year fixed mortgages are typically 20 percent, which can be a decent size of a buyer’s savings.

15-Year Fixed Mortgages are a great choice for first-time home buyers but may not be the most logical for everyone. Since the term of the mortgage is half the time as a 30-year mortgage, monthly payments will be much higher. But these mortgages have lower interest rates, and payments start going toward paying down the principal more quickly. While a 15-year fixed seems like the obvious choice, the larger payments can be harder to manage.

Adjustable Rate Mortgages are also popular for first-time home buyers, but there are both advantages and disadvantages. Interest rates are usually lower early in the loan term, but the rates can change throughout the life of the mortgage. Adjustable rate mortgages are often used by buyers who don’t plan on living in one house for too long. They also allow buyers to save more money while the interest rates stay low, but if rates go up, the payments increase as well. With the current state of the economy and rising interest rates, it may not be the best time for an adjustable rate.

Traditional FHA Loans: The Federal Housing Administration (FHA) insures loans so lenders can offer first-time homebuyers better deals. Traditional down payments range from 10 to 25 percent, while the FHA allows a down payment of only 3.5 percent. The FHA is also more lenient with lower credit scores, but the down payment will be higher. The FHA also allows down payment funds to come from gifts, assistance programs, and grants. This type of mortgage is more popular among potential buyers who have higher debts. The downside? FHA mortgages require two types of mortgage insurance premiums – one is paid upfront, and the other is paid on a monthly basis. 

The good news is that many first-time home buyers are able to get some type of mortgage. It will require patience through the application process, and good financial planning to make the monthly payments. But real estate is still largely considered a good investment – and a home of your own is a good place to begin a great future.

 

By Greg Nixon, Nixon/McGowan Team, Casandra Properties Inc.

Greg Nixon is a licensed New York State real estate salesperson who is part of the Nixon/McGowan Team for Casandra Properties Inc. For more information, reach Greg at gregory@CasandraProperties.com or call 718-816-7799.

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