Let’s be honest, looking for homes is a lot more interesting than getting the mortgage. Window shopping online and touring houses is exciting, while getting qualified for and choosing the home loan not so much. So, it is only natural when buyers house shop first. But, this can actually lead down the path of a letdown to a buyer’s mortgage payment budget. To prevent this letdown, let us show how to buy a house with the payment you want. Basically, this starts with reversing the buyer’s thought process from find the home first and then get the mortgage next. Therefore, we explain the biggest factors that affects the mortgage. Ending spoiler alert – It is not just the rate!
Focus on This to Get the House Payment You Want!
What’s the interest rate? It is the first question a mortgage loan officer usually hears. First of all, the interest rate depends on the individual scenario. There is no “one rate fits all”. Next, the interest rate is an important factor in the monthly payment. But, there is another payment factor that is more important. Usually the biggest payment influencer is the house itself. So, choosing the house is going to make the largest difference in your monthly payment.
Get the Mortgage Before Purchase Contract
Just because the house itself is the biggest payment influencer, does not mean to go house hunting with a Realtor first. Rather, it is best to make sure a buyer is qualified, knows their payment and price range, plus has realistic expectations. Too many home purchases end in disaster by getting under contract first and then trying to get a mortgage. Reasons include using the online payment calculators that are missing key information, buyers not qualified for the home, and not allowing sufficient time for getting qualified.
Now, this does not mean you cannot talk to a Realtor first. There is nothing wrong with this at all. But, professional Realtors will want to see your qualification before shopping blindly for homes. By going through the mortgage process before looking at homes, buyers…
- Are more prepared
- Choose a house within qualification range
- Reduce chances of wasting time and money
In this article, we discuss not only how the interest rate affects the payment, but other areas that usually make a bigger payment difference.
How to Buy a House With a Budget
If a buyer is shown really nice looking houses and uses erroneous information or assumptions about the monthly payment and down payment, it is not going to end well for the buyer, Realtor, or seller. Therefore, starting the home buying process should involve discussing areas such as…
- Qualification involving credit, income, and assets
- Interest rates
- Mortgage insurance (if applicable)
- Property taxes – county (and possibly city)
- Insurances – homeowners, wind/hail, & flood
- HOA dues
- Down payment
- Selling current home
Taking this qualification and then applying it to the buyer’s “want list” creates a scenario for a more specific home search. So, let’s discuss how much more than the interest rate affects finding the right mortgage payment for the right home.
How to Buy a House – Mortgage Payment Breakdown
As you can now tell, there’s a lot that determines a house payment. In order to stay within a budget, we want to educate you on these key points. Then during the qualification process, we will discuss how each applies to your home purchase.
What is Mortgage Insurance (PMI)
Often, PMI is the one factor many forget to include in the mortgage payment. Online payment calculators are notorious for assuming everyone can put down 20% and avoid it. Of course, they want you to see a low payment for every home. But, buyers who have less than 20% down payment have some form of mortgage insurance attached to their mortgage.
Mortgage Insurance Purpose
First of all, mortgage insurance is not life insurance. Rather, it protects the lender in case the borrower defaults on the mortgage. When a home is foreclosed, the lender usually loses money. This PMI protects the lender against these losses. Many believe PMI is bad for this reason. Yet, PMI allows buyers to purchase a home with a low down payment. So, it is a very good thing for buyers.
Depending on the mortgage program, credit score, down payment percentage, and other factors, the amount and form of PMI can vary. Some programs like USDA have a fixed mortgage insurance, where others like conforming loans can vary widely. Navigating through the maze of mortgage insurance options is where an experienced mortgage loan officer helps.
How Much is Mortgage Insurance? Choosing the Right PMI Option
Very often choosing a certain home loan involves comparing the PMI options. PMI may come in the form of monthly, single up-front, or both. There’s even an option where it is included in the interest rates.
VA Loan Mortgage Insurance
Military service members, Veterans, and surviving spouses have a wonderful, no money down option. VA loans now provide a way to buy a home with no down payment up to any loan amount. Fortunately for VA eligible buyers, there is no monthly mortgage insurance. Although, there is one form of PMI financed on top of the loan. It is called a VA funding fee and the amount depends on several factors.
Furthermore, there is the ability to waive the VA funding fee. This is waived for VA eligible borrowers with a service connected disability of 10% or more as well as purple heart recipients (effective 1/1/2020).
FHA Mortgage Insurance
FHA charges both an up-front, financed and monthly mortgage insurance. For buyers with less than 5% down payment, the fees are static. But, with a little more down payment or shorter term, the monthly amount decreases. Additionally, a common misconception is that FHA monthly mortgage insurance cancels at 80% of the value. Current FHA loans do not have this feature. Actually, the only way to cancel FHA PMI on a 30 year loan is to have 10% equity at loan closing. Then, the PMI may come off after 11 years.
USDA Mortgage Insurance
When USDA is an option, it usually beats FHA. Believe it or not, USDA requires no down payment (beating FHA by 3.5%) and the monthly PMI is much cheaper than FHA. No down payment and cheaper payment? Many buyers do not know about or consider this powerful option. Plus, there is no loan limit! Imagine a lower payment and keeping funds in the bank! All of this makes USDA tough to beat.
Conventional Loan PMI
With a down payment of 3% or more, conventional loan options come into play. The cash to close may even be a gift, allowing buyers to become a homeowner without their own funds into the deal. Conventional PMI options allow buyers a lot of flexibility to choose the right option to meet the buyers goals.
Property Taxes Affects House Payment
Death and taxes right? Well, homeownership comes with taxes too – Property taxes. At least each property has county property taxes. Additional taxes could include city, school, or other forms of taxes. For instance, Oak Island NC town taxes includes a sewer district fee. Unknown taxes like these could cause a surprise to buyers late in the process.
Furthermore, states may treat property taxes differently. Examples include semi annual payments vs annual. Some states like South Carolina provide property taxes for owner occupancy through a residential exemption. Another discount is called a homestead exemption. Even further, many states offer various property tax discounts and even exemption. An example of free property taxes involves owners who are military Veterans with a 100% service connected disability.
Escrows for Property Taxes
Including property taxes in a mortgage payment is very popular and often REQUIRED. For instance, escrows for both property taxes and insurances are required on FHA, VA, and USDA loans. Additionally, borrowers with less than 20% equity or down payment must escrow taxes and insurance. When the loan is closed, any property taxes due must be paid. Next, funds are deposited into the escrow account sufficient enough for paying based on the next due date. Remember taxes may be due annually, semi annually, or more often. The due date compared to the closing date determines the amount of escrow deposit.
How to Buy a House With Low Property Taxes
Again, it is more than just the interest rate. Paying attention to property taxes can be part of a home buying strategy. When it comes to a lower house payment, consider the following…
- Buying outside the city limits (no city property taxes)
- Purchase in a county with low tax rates
- Look for property tax discounts or exemptions
- Compare tax value and bills among properties
Purchasing a home in the county saves city taxes. Although some cities have reasonable property tax rates. Yet, some city tax rates come close to the county rate. If a buyer is very flexible on where to buy, compare tax rates between neighboring counties. As discussed above, counties and states may offer discounts or even free taxes. Discounts may be for living in the house, being a Veteran, disabled, and/or a senior citizen, etc.
Finally, some houses just have lower tax value than another. Assuming the same tax rates, a lower tax value would result in lower property taxes.
Any of these areas affect the housing budget, plus could mean the difference between approval and denial.
The Role of Insurance in Buying a House
Buying a house always involves insurance. At a minimum, hazard insurance is required. Otherwise known as homeowners insurance. Other insurances depend on the level of risk for flood, high wind areas, or earthquakes. When homes are in high level areas like these, additional insurance may be required.
Choosing an insurance agent to provide insurance quotes early is a good idea. A guess could work if qualification is not an issue. But when qualification or affordability is tight, get an early quote on a property of interest.
How to Buy a House – Insurance Strategies
Insurance is an area that a buyer can potentially lower their mortgage payment. Although, do not just go with cheap! Ensure that acceptable coverage is in effect.
Here are some areas which may lower insurance premiums.
- Higher deductible
- Home safety features such as an alarm
- House condition
- Recent renovations (especially a roof)
- Combining hazard plus wind & hail into one policy
- Assuming grandfathered policy
- Flood insurance strategies
An experienced loan officer recognizes the importance of choosing a good insurance agent. So, recommending insurance quote up-front is a good idea for accurate payments.
Escrow Waiver Strategy
Some borrowers prefer paying their own taxes and insurance. Only available on a conventional loan, borrowers borrowing 80% or less of the purchase price/value may waive escrows. Even though taxes and insurance may be paid by the borrower, they are still factored in the debt to income ratio.
HOA Dues Affect the Housing Expenses
Buying a house within a subdivision often involves paying a fee called a homeowners association fee. Otherwise known as HOA dues. This fee may be due monthly, quarterly, semi-annually, or annually. The purpose of the HOA dues is to cover development expenses such as common areas, insurances, pool, maintenance, road maintenance, and more.
Even though HOA dues are a housing expense, they are not included in the mortgage payment. Yet, they are included in a borrower’s qualifying debt ratio and a borrower’s budget. How much the dues are depends on the HOA costs divided by the number of owners.
Buying a House and Choosing the Interest Rate
We have spoken about a lot of strategies, but choosing the mortgage rate is important as well. Hopefully, it is proven how rate is not the only thing as there are so many strategies that affect loan approval, cash to close, and the housing payment. Fortunately, we have great interest rates for our home loan solutions. Unlike the popular first question, “What is your interest rate right now?”, there is no “one, all encompassing interest rate”.
What Determines the Interest Rate?
If there is not one interest rate, what affects the rate? Actually, there are more than 30 factors! Here are a few key points:
- Credit score
- Occupancy type
- Loan program
- State property is located in
- Property type
- Down payment
- Paying origination fee, discount points, or neither
So if a borrower is looking for that one rate, a good loan officer will turn this into a discussion and discovery session rather than blurting out a rate. Just giving out a rate would be a disservice to a client without the information above. In addition to these factors mentioned (along with many more), what meets the clients’ goals and scenario are key. For instance, a buyer looking for low closing costs may choose a no origination fee with a little higher rate. Sometimes, there are price breaks in certain rates and an expert loan officer will seek these and explain to borrowers.
The most important thing to remember is the lowest rate is not always the best option. Although, that is part of the discussion I have with clients.
How to Buy a House With the Right Price
By now anyone should see there are a ton of factors involved in buying a house. Now, let’s talk about the price. Believe it or not, the lowest price is not always the best choice. Do what??? Yes! There are cases where paying a higher price is the optimal strategy. One such reason to buy a house with a higher price involves the seller paying buyer’s closing costs. Therefore, the buyer brings less funds to closing. A key strategy for buyers with low to no down payment.
Another reason to pay a higher price is purchasing a home that is in a competitive situation. Fortunately for sellers, low inventory levels and a high number of buyers creates bid wars. Thus, buyers may need to increase their offer to solidify a contract. Just remember what has been learned in this article, it is not just the price. Remember to research the property taxes, HOA dues, insurances, maintenance, and the interest rate. Although, the price will make a difference.
How to Buy a House Summary
In the end, a buyer using an experienced loan officer and Realtor can make the biggest difference in choosing the right house, the right payment, the optimal cash to close, and overall understanding the answer to “How to buy a house”.
Now, start the conversation with an expert loan officer who will spend the time to help you choose the best strategy that meets your unique scenario and goals.