On April 18, 2016, Business Insider reported that rental prices in major markets, including San Francisco, had finally begun to drop. But let’s face it—the sub $1,000 one-bedroom apartment in major markets is now merely a story for millennials to tell their grandkids.
For those thinking about becoming a first-time homeowner, the long-term benefits of home ownership make more sense on paper than renting. However, to a renter who already has a full-time job to worry about, the idea of mailing a check once each month can sound far less stressful than worrying about a down payment, private mortgage insurance, and closing costs, among many, many other things.
One constant formula used in the housing industry states that the less daunting home ownership feels, the more likely renters will become homeowners. Even amid increased regulation, private lenders have been working for years to make home ownership comprehensible, simplifying the process with state-by-state training and testing requirements that ensure loan officers are able to handle a wide index of scenarios. With top lenders, it is even common for borrowers to have their loan officer’s cell phone number.
Although borrowers who take advantage of these highly skilled loan officers are never alone in the home buying process, it is critical for first-time homeowners to go into this process with an understanding of some of the unique aspects and costs that go into a mortgage. Here are the most important ones:
- Down Payments: The down payment has an everlasting effect throughout the life of the loan. The higher the down payment, the lower the interest rate. The ideal down payment is equal to or greater than 20% of the purchase price, and anything below this threshold requires the additional purchase of private mortgage insurance (PMI), which increases the amount of the monthly mortgage payment. If a 20% down payment is not feasible, the Federal Housing Administration allows down payments as low as 3.5% with PMI. Through VA loans, military veterans are eligible for similarly low down payments with no PMI.
- Private Mortgage Insurance: What is PMI, and how much does it cost? Let’s keep it simple. PMI reimburses the lender in the event the borrower defaults on a home loan, and this coverage typically costs between 0.5–1.0% of the loan. Remember, the less risk the borrower brings to the lender, the better the deal they will receive.
- Closing Costs: Closing can be broken into two groups—recurring closing costs and non-recurring closing costs.
- Recurring Closing Costs: Recurring closing costs include property taxes and homeowner’s insurance.
- Property taxes can fluctuate greatly during an owner’s time in a home, and they have been a controversial issue as of late, especially in gentrifying urban neighborhoods across the country. Last year, philly.com wrote about Rose George, a 78-year-old woman in Philadelphia’s rapidly growing Francisville neighborhood. In just one year, her home’s property taxes tripled. But property tax hikes often paint a prettier picture, and Rose’s case is no exception. Her home’s value was appraised at $223,500, and she purchased it in 1965 for $4,000 ($30,300 in today’s money).
- Home insurance is heavily determined by location. A home in a dense, urban neighborhood is typically more expensive to insure than a home in a suburb due to crime, and because a fire is more likely to spread when homes are closer together. The age of the home and the buyer’s credit score also play a role in the insurance premium.
- Non-Recurring Closing Costs: Non-recurring costs are the fees that go into conducting the real estate transaction. These include title insurance premiums, recording fees, notary fees, credit report fees, and others. This is where a qualified loan officer can turn a headache in a breeze.
The road to home ownership is not easy. Nevertheless, it is important to remember that the more complex the loan, the more private lender loan officers who have custom training and offer personal attention will serve you well. Their job is to make sure that first-time homeowners never feel alone or overwhelmed.