It's a great time to be a first-time homebuyer.
Housing prices have fallen steadily over the past few years, and first-time buyers have their pick of the housing market without having to sell their own homes. In fact, first-time buyers accounted for a bigger share of home purchases this year than the previous two years, according to the
National Association of Realtors
Still, buying your first home is a major financial decision. Understanding the dollars and cents of buying a house will give you a head start toward making a successful purchase.
Here are a few financial tips for buying your first home.
Make a budget:
Before buying a house, know what you can afford. A mortgage lender can help you figure this out, but it's a good idea to know how much of your monthly budget can go toward a mortgage payment. In general, your annual housing costs should eat up less than 30% of your income. If you make $50,000 a year, plan to spend $15,000 or less annually, or $1,250 a month, on housing.
Bear in mind that figure includes your mortgage as well as any other housing costs, including property taxes and regular maintenance. These added costs can total 5% per year of your purchase price, and should all be figured into your monthly budget. For more on the hidden costs of homeownership, read
Research a mortgage:
The most popular types of mortgage is a fixed-rate mortgage (FRM), in which your interest rate doesn't change over the life of the loan. Nevertheless, some homebuyers opt for an adjustable-rate mortgage (ARM). ARMs often carry a fixed rate for a set number of years, after which your rate (and therefore your mortgage payments) will change each year. (For more on the difference between ARMs and FRMs, read
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
. 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
set up by the National Association of Home Builders.
Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.