When you’re a first-time homebuyer, the process of finding a house and getting a mortgage can be complicated and overwhelming. You may have heard about down payments, title insurance, and private mortgage insurance, but do you really know what they are? Let’s break it down.
Down Payments
You probably know that a down payment is the cash you pay to the buyer of your new home–your mortgage lender pays them the rest. It may not be clear, though, how big a down payment you should expect to pay, and why.
Your parents have probably told you you’ll need to put down 20%. That used to be true, but mortgage lenders are more flexible today. You should expect to put down at least 10% of the purchase price of your home with conventional financing, and 3% to 6% if you’re getting an FHA loan.
Why do lenders require a down payment? Your mortgage lender wants to minimize the risk that you won’t pay them back the money you owe them. If you have been able to save up a relatively large amount of money to put towards your house, odds are good that you will have the resources to pay back the balance of your mortgage. The higher your down payment, the more favorable a risk you are, so if you put less down you can expect to get a higher interest rate. That higher rate will cost you thousands of dollars over the life of your mortgage.
Private Mortgage Insurance
One way that mortgage lenders can ensure that they get back what you owe them is by requiring you to buy private mortgage insurance. If you default on your loan, the mortgage insurance company pays the lender the balance of your mortgage.
You can expect to have to buy private mortgage insurance when your down payment is less than 20% of the purchase price of your home. And you will continue to pay it until your mortgage balance reaches 78% of that value, although you can ask your lender to discontinue it when you get to the 80% threshold.
PMI rates vary depending on the size of your down payment and your credit score. The amount you pay in PMI could be negligible, or it could be enough to price your mortgage payment out of your budget. If your down payment is less than 20%, talk to your mortgage lender to find out how much you should budget for PMI.
Title Insurance
Odds are that you aren’t the first person to buy your home or property. The previous owners held the title to it before you did. Sometimes, though, people that don’t have full ownership of a home sell it anyway. For example, perhaps a couple got divorced, and the wife continued to live in the home while the husband retained an ownership interest. If she were to sell that home, even many years later, he would have to sign off on the sale. But sometimes that doesn’t happen.
Title insurance protects you from claims by people who may still have a stake in the ownership of your home. While these claims are rare, they do happen, and they can get expensive. The best way to protect yourself against them is to purchase title insurance. Your mortgage lender will likely require it, but if they don’t, they will probably offer it to you as an option.
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If you think you’re ready to dive into homeownership, use our mortgage calculator to find out how much mortgage you can afford. Then you can do a map search to find homes in your price range. And when you’re ready to start visiting houses, call us at (301) 882-8186. You’ll be happy you did.