Buying a home, especially for the first time, is a big decision and a big purchase—likely the biggest purchase you’ll make in your lifetime. As a result, the house—and mortgage—you choose will significantly impact your life. To ensure you’re prepared, here are a few things to do before taking out a mortgage:
1. Narrow Down Your Neighborhoods
It may seem obvious, but the first step is to decide where you want to live. Is this the time to move to a different state or city? Or are you looking at neighborhoods nearby? If you’re deciding with someone else, like a significant other, check in with them to make sure you’re on the same page.
If you’re considering moving to a nearby neighborhood, you should drive around or visit to get a feel for it. If you’re considering moving to a new city or state, consider spending a few days there to ensure you’re comfortable with your decision.
2. Decide On Your Price Range
The next step is to figure out how much you want to spend. To get a feel for the price range in the neighborhoods you’re shopping in, look online at homes in those neighborhoods and check realtor websites. Figure out your must-haves and your wish list. How many bedrooms do you want? Bathrooms? Is a yard important to you?
In addition to giving you a feel for the neighborhood’s overall price range, online realtor websites can help you understand how much the type of house you want will cost.
3. Decide On A Down Payment
Now that you have a price range in mind, decide how much you want to put down. Making a 20% down payment will mean you don’t have to pay for private mortgage insurance (PMI) with a conventional lender. Putting a larger percentage down means smaller monthly payments because you’ve already paid for a larger portion of the house.
However, most lenders allow for a down payment lower than 20%, and buyers often opt to put a smaller percentage down.
4. Choose A Lender
Once you know how much you want to spend and your down payment, it’s time to start shopping around for a mortgage. Check with different lenders to see what terms and interest rates they offer. You’ll also have to choose a mortgage term or the amount of time (usually 10, 15, 20, or 30 years) you’ll have to pay back your mortgage.
Make sure you know how your loan term affects how much you’ll pay overall and what the closing costs will be in addition to your down payment.
5. Decide Whether To Get Life Insurance
A home is a large purchase, often made in conjunction with significant life events, such as getting married or having a child. Many home buyers opt to get a life insurance policy to ensure that, if something were to happen, their surviving spouse or partner would be able to continue to pay the mortgage. Buyers on a budget often choose a term life policy that matches their mortgage term.
Buyers looking for additional benefits may choose a permanent life insurance policy, such as whole life insurance. What is whole life insurance? It’s a life insurance policy that offers, among other things, a cash value component, potential dividends, and lifelong coverage.