Buying your first home is exciting. It’s a rite of passage, it’s the perfect time to put down roots and settle in one place, and it’s an opportunity to build equity faster than renting. But buying your first home can also be daunting and risky. There are lots of things to consider when financing a home: lenders, down payment, interest rates, hidden costs like inspections or title insurance… It can all feel very overwhelming for someone without experience in real estate and financial matters. That’s why so many parents help their children buy their first home. However if you aren’t ready to hand over the keys to your teen just yet, read on for some tips on how to educate them on securing a mortgage for their first home.
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What is a Mortgage?
A mortgage is a loan that you take out to finance the purchase of a home. You “secure” it by promising to repay the money you owe. You usually pay interest on a mortgage loan, just like you would on any other type of loan. You can also pay off your mortgage loan early if you have the money to do so. The amount you borrow is called the “loan amount” or “loan amount outstanding.” The amount you actually pay for your home is called the “principal.” The difference between the two is your “equity.” You can also think of equity as the amount you own in your home.
Research the Process of Securing a Mortgage
The first step in educating your child on the process of securing a mortgage is familiarizing him with the terminology. Make sure he understands what a mortgage is, what the loan amount outstanding is, and how much he will need to put down as a down payment in order to qualify for the lowest interest rate possible. Next, review his credit score. The higher his score, the better his chances are of being approved by a lender and being offered a good interest rate. Credit.com offers a great online tool to help track your credit score, manage your credit report, and find out what factors affect your credit score. Your child should also understand how rates are calculated. The average rate on a 30-year fixed mortgage is currently 3.94%, according to Bankrate.com. But if interest rates were to rise, monthly payments would also increase.
Finding a Real Estate Agent
A real estate agent can be a huge help in the process of securing a mortgage. He or she can advise your child on what lender to go with, how much he can borrow, and what type of loan is best for his particular situation. Find a real estate agent who has experience helping first-time home buyers. If a person has been doing this for a long time, he or she will know the ropes and what to expect. An experienced real estate agent can also tell your child what to watch for and what to avoid. Find a real estate agent who is reliable, honest and trustworthy. A good real estate agent can help your child save money, be organized and avoid costly mistakes. A bad agent, on the other hand, can waste your child’s time and cost him money.
Defining Your Needs
Before you start shopping for a loan, it’s important to know what you can afford. This means calculating your maximum monthly payment, factoring in other monthly debt payments, and determining how much of a down payment you can make. Your child should also familiarize himself with the different loan types, such as a fixed-rate mortgage, an adjustable-rate mortgage, and other options.
Equity and Loan-to-Value Ratios
As your child is looking for a mortgage, he should also understand how equity and loan-to-value ratios (LTV) are used in the approval process. Equity is the amount of money that you’ve invested in your home. Your equity is the difference between how much your home is worth and how much you owe on it. Loan-to-value (LTV) is the ratio of how much you owe compared to how much your home is worth. Lenders use equity and LTV to figure out how much risk they’ll take on. The lower the risk, the more likely the lender is to approve your child for a mortgage. He can boost his equity by putting more money down on the home or by making sure the interest rate is as low as possible. He can lower his LTV by choosing a shorter loan term or a smaller down payment.
Closing Costs
Closing costs are the fees associated with securing a mortgage. They include things like an appraisal fee, title search and insurance, and mortgage origination fee. Closing costs can add up to several thousand dollars and are often not included in the advertised mortgage rate. Your child should also be aware of how much he’ll need to save for a down payment. He can use the down payment calculator to figure out how much he’ll need to save for a down payment on a home.
Rates, Points and Other Confusing Terms
Rates are the amount of money you’ll pay to the lender to borrow money. Points are one type of fee that can be tacked on to your mortgage rate. A credit score impact percentage tells you how much your credit score will be negatively affected if you do not pay off your mortgage loan on time. A payment schedule is a chart that shows your monthly payments, including principal and interest. A loan term is the length of time you have to repay the loan.
Bottom line
Buying your first home is a big deal, and the process of securing a mortgage can be even bigger. It can be easy to get overwhelmed, especially if this is your first rodeo. However, once you understand the terminology, know what you can afford, and understand the process, it will be a lot easier to navigate the waters.
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