First-Time Homebuyers Have an Edge

How much interest you pay on a mortgage is determined by the interest rate. However, the annual percentage rate (APR) is a measure of the actual cost of your loan. When the day finally comes to sign the papers on your new house, your lender will charge you closing costs. An estimate of these costs is provided in advance and includes the appraisal fee, title search fee and filing fees. Closing costs range between 2% and 4% of the overall loan amount. Closing costs are factored into calculating the APR of your loan, so when comparing different mortgage offers, make sure to look at the APR as well as the interest rate.

The next step is to get prequalified by a mortgage lender. The prequalification is where a bank agrees to loan you up to a certain amount of money before you have found a home. Your best bet for finding a lender is to approach a bank with which you already have a relationship.

Failing that, ask friends and family for recommendations. Make sure to shop around to find the most competitive offers. You can search for rates in your area on the mortgage section of BankingMyWay.com. It's important to talk to a lender before beginning the search for your home since many real estate agents won't take you seriously unless you are prequalified. Besides, you'll want to be ready to place an offer in the event that you find the home of your dreams.

Study the taxes: The interest you pay on your mortgage is tax deductible, provided you qualify and itemize on your income tax return. The qualifications are pretty simple. It has to be your primary residence and your debt. (In other words, if your parents are paying the mortgage, you can't deduct those payments on your taxes.)

In addition to the deduction, Congress' recent housing bill provides a $7,500 tax credit to first-time homebuyers who buy a home between April 9, 2008, and July 1, 2009. The amount of the credit is phased out between income limits of $75,000 and $95,000 for individuals ($150,000 and $175,000 for couples filing jointly). However, the credit is really just an interest-free loan, since the $7,500 is repaid over the course of 15 years as an extra $500 on your annual taxes. For more information on the tax credit, you can check out the Web site set up by the National Association of Home Builders.