Categorized | Real Estate

A Young Home Buyer’s Mortgage Primer

This guest post was inspired by MLR’s recent update on his home purchase. As a guy in my early 20s, I’m getting ready to purchase a home myself, and the fact that I work for an internet mortgage information services company has given me some interesting firsthand experience with the lender side of the transaction.

I want to expand on what MLR introduced a month ago and offer a few home buying pointers that I’ve gleaned from my line of work. These points are intended to help you be intentional about leveraging your mortgage and your home for financial success.

But first, let’s talk about bread.

Everyone knows how to walk into a grocery store and buy bread. Centuries of marketplace development, mass consumer input, and a lifetime of incremental firsthand experience combines to make the bread purchasing process simpler for you than it’s ever been. But as much as your neighborhood market would like you to believe that their prices and their quality are the best in the world, the truth is that there’s still room to apply a bit of sweat equity to the transaction and get a better deal.

With some work, you can probably find better bread at lower prices elsewhere. And this is bread we’re talking about, not a sophisticated financial instrument like a mortgage. As much as it may seem that the mortgage application process is streamlined to assist consumers who have no clue what they’re getting themselves into, you’re setting yourself up for failure, or, at best, minimal success, if you don’t do it right.

realestatesigns

Set Yourself Up For Success

You’re not buying a home. You’re buying an investment portfolio, and you’re funding the portfolio with a mortgage. What does this mean for you?

1. Know what you’re doing.

Don’t try to use debt to get ahead unless you know what you’re doing and you understand the costs involved. You don’t need to be an economist, but you need to have a strong sense of where you are and where you’re going, financially. Take the time to do some calculations. Make sure you’re ready to purchase a home.

Reread MLR’s Back from the Dead post, in which he spends a paragraph or two detailing the money he’s saving as a homeowner. You think this happened by accident? As with all things, calculate the costs involved before you move forward.

The best way to monitor your financial situation is through effective budgeting. Read the linked article. If you haven’t completed all of the steps outlined there, you’re probably not ready to buy a home. And that’s just a place to start. Talk to a trusted mentor or financial professional and discuss your options.

Don’t buy a home for social reasons. It might be nice to own a home, but unless you’ve got a family of five and you need the room to expand, your home is a financial product.

2. Every lender is different.

The first and most important part of taking on a mortgage is finding the lender or mortgage broker that offers the best rate on the investment. Most lenders offer similar rates. But similar does not mean identical, and closing fees and loan terms differ. The speed with which a given lender can close your loan makes a difference, too.

MLR’s Note: When I was going through my process to get pre-approved for a lender, I can tell you, I was quoted very similar rates, but my expected cost varied wildly. Between some charging points, lock in fees for the rate, appraisal fees, etc… some lenders with a slightly lower rate wound up being much more expensive.

Compare lenders and the mortgages they offer. You can check out current mortgage rates provided by multiple lenders at Lender411.com, Bankrate.com, LendingTree.com, or any other major internet mortgage site. For the sake of disclosure, be aware that I work for Lender411.com.

3. Get preapproved, not prequalified.

Prequalification is a meaningless thing. It’s an unofficial guess as to how much money you’ll be able to borrow. The guess is made by a lender who has received nothing more than a verbal statement from you regarding your own income and credit history. Prequalification won’t give you any financial backing to negotiate with.

Preapproval is different. It’s like applying for the loan in advance. Lenders will look at tax returns, pay stubs, bank statements, and your official credit report to determine what loan amount you’re qualified to receive. You’ll receive an official preapproval document that carries real financial weight. With this in hand, sellers will be willing to negotiate with you and you’ll close your loan much faster.

4. Avoid mortgage insurance.

Private mortgage insurance (PMI) is required for all conventional mortgages and Federal Housing Authority (FHA) mortgages in which the borrower purchases less than 20% of the equity of the home at closing. In other words, if you don’t make a 20% down payment, you’re going to have to pay for PMI. How much does PMI cost? It depends on the cost of your home, but you can expect to pay at least $50 or $60 per month, or $5,000 or more over the life of the loan.

The best way to avoid PMI is to make the 20% down payment. But many young home buyers can’t do this. The next best thing to do is to make at least one if not two additional mortgage payments each year toward the principal balance of your loan. This will build your equity faster than otherwise.

If your mortgage has a longer term length or you’re making minimum payments or, horror of horrors, missing payments now and then, it will take longer to gain the 20% equity required to eliminate the PMI. The best thing you can do is manage your mortgage well and make additional payments to bring down the principal.

5. Don’t take out an adjustable rate mortgage.

An adjustable rate mortgage gets you a low initial introductory rate for a brief fixed period. If you’re able to refinance into a low fixed rate before this period is over, it’s possible to use an ARM to your advantage. But most of the time, an ARM is a bad idea.

Please, just don’t get one. This may sound a bit dramatic, but unless you have a good idea of where the mortgage marketplace will be in seven years when your rate begins to adjust, you’re asking for uncertainty at best and financial terror at worst. Get a mortgage with a fixed rate.

6. You can negotiate closing costs.

Negotiation is a wonderful thing. Just about every closing expense you’ll have to pay, from the rate lock fee to the broker commission, is negotiable to some extent. Your success will vary depending on the lender you’re working with and your negotiating abilities. Here’s a list of a few fees you may be able to negotiate lower.

  • Origination fee. This is simply the lender’s profit. Profit can always be negotiated, though you may not have much leverage to bargain with.
  • Assumption fee. This one doesn’t apply in every case, but if you’re assuming a mortgage of a previous borrower, many lenders will charge you an assumption fee. Assumptions don’t cost lenders any additional money, which makes this fee unnecessary.
  • Appraisal fee. This is the worst. Many lenders will charge you for the appraisal even after you’ve paid for it yourself. It’s just standard practice. Keep careful records and watch out for this.
  • Mortgage insurance application fee. Exactly what it sounds like. Any private mortgage insurer worth working with will waive this fee. If your lender is charging it to you, dig deeper and find out why.
  • Document preparation fee. Sometimes this fee is used to hire an attorney to review certain documents, but most of the time, it’s charged for no reason at all.

This list of closing costs and fees hosted on Zillow.com is pretty extensive and will give you an idea of the various costs you may have to cover at closing.

Oh, and MLR’s post reminded me of one more thing…

7. An emergency fund is a wonderful idea.

One missed payment on your mortgage will destroy your credit score, and there’s no better way to hinder your future financial success than a poor credit score. As in MLR’s case, it’s better to make a smaller down payment and retain an emergency fund than to pay everything you can up front.

MLR’s Note: I went back and forth with myself over this dilemma. In the end, having a year of living expenses in my bank account as a safety net is worth the bit in PMI I will pay for a few years. Because I have that safety net, I am paying additional on top of my mortgage to accelerate paying down the mortgage and get rid of PMI.

Be intentional about your mortgage.

This is really the point. Remember the bread story. Even with a product as simple as bread, you can save money if you take the time to research your options and do it right.

A mortgage is a tool you can employ to your advantage if you’re willing to be intentional about using it for financial success.

Get to know the author!

Kyle Chezum is a content specialist at Lender411.com. Lender411.com helps borrowers find the lowest mortgage rates by comparing quotes from qualified local lenders in real time. Kyle enjoys writing, hiking, and tracking real estate value trends in his spare time.


has written 1 posts on MyLifeROI.com.


If you like 's posts, make sure you get free daily updates by either subscribing to RSS or signing up for email updates!


And lastly, feel free to contact the author via e-mail.

25 Comments For This Post

  1. Steve Says:

    #5. Don’t take out an adjustable rate mortgage.
    I agreed. Fixed rate mortgage is the best, best would be <5%.
    The coming inflation could be very huge, fixed rate mortgage is the way to go.
    Steve´s last [type] ..Construction Heavy Machinery

    [Reply]

  2. Sophie Says:

    Thanks for the information stated here…I hope this can help…
    Sophie´s last [type] ..Workout Routines for Men: Reason for your fitness!

    [Reply]

  3. Gia Says:

    Thanks for the great information because for sure this can help…
    Gia´s last [type] ..Natural Male Enhancement Methods

    [Reply]

    John Reply:

    Hi. I just love it. I’ll check at google to find more info about it.

    [Reply]

    John Reply:

    Hi. I just love it. I’ll check at google to find more info about it.

    [Reply]

  4. Christy Says:

    In some cases, it’s a significant portion that would now not earn any investment return. Depending on how you structure your repayments, it will take years to put in the amount you took out. If you’re at an age where you are heading closer to retirement, your RRSP balance may be well short of what you planned. If you’re young, you still have plenty of time to make up for the withdrawal. However, if the amount of the withdrawal is significant, you may want to re-evaluate some of your future plans.
    Christy´s last [type] ..Gold and Silver

    [Reply]

  5. Fresy Says:

    I am not familiar with this and I am happy i have found this post too…
    Fresy´s last [type] ..helpful software for affiliate marketing

    [Reply]

  6. Jorv Says:

    I’m not much into reading, but somehow I got to read many articles in your webpage. It’s fantastic how interesting it is for me to visit you very often.
    Jorv´s last [type] ..Maclaren Volo Baby Strollers

    [Reply]

  7. Lea Dee Says:

    I’m happy to read this article because it seems I had no idea about this.

    Thank you for sharing.

    -Lea Dee

    [Reply]

    mlroi_fan Reply:

    Great post and advice, thanks!

    [Reply]

  8. Aram Durphy Says:

    You make a very good point about an emergency fund. I always recommend that savings go first into an emergency fund that can cover six months of expenses, then into longer term investments. So many people are caught off-guard when something goes wrong, and have to use credit card debt to cover the emergency (or worse).
    Aram Durphy´s last [type] ..Benjamin Graham’s Checklist

    [Reply]

  9. Kel Says:

    There is some great information in the above post. I would stress to a first time home buyer that they shouldn’t stretch the budget to get more house, or buy to their max limit. A mortgage payment is something that you really want to be comfortable in, the one thing that you will still want to be able to pay if things get tight or some type of unforseen financial event arises.

    [Reply]

  10. askforloans Says:

    nice blog , it was nice to read this blog
    for instant home loans you may contact to askforloans @ home loan noida

    [Reply]

  11. Aram Durphy Says:

    Nice article. I would add to the lender section that credit unions tend to offer better rates with less fees than banks. So, always check with your local credit union, something many people never do.
    Aram Durphy´s last [type] ..Value Traps: a Look at Hewlett-Packard

    [Reply]

  12. Rio Says:

    Young people should not be afraid to get a mortgage. It is the best way to settle up and become independent. Once you try independence, you cannot give it away anytime soon:)

    [Reply]

  13. Madhavi @ Small Business Ideas Says:

    #5. Don’t take out an adjustable rate mortgage.
    I agreed. Fixed rate mortgage is the best, best would be <5%.
    The coming inflation could be very huge, fixed rate mortgage is the way to go…..Madhavi….http://www.allbusinessideas.com
    Madhavi @ Small Business Ideas´s last [type] ..Distributorship opportunities / Business Opportunities in India

    [Reply]

  14. Stan Says:

    Interesting, I didn’t know this.

    [Reply]

  15. Martin Says:

    [...]The best way to avoid PMI is to make the 20% down payment.[...] – exactly!

    [Reply]

  16. Joe Says:

    It looks like lenders are happy to lend money now and housing market is likely to hot up again. So, you should read these advises before going out and looking for houses to buy. Calculate what you can afford and search. Otherwise, you will be disappointed when you find a house and realize you cannot afford. Even worse, you buy a house you cannot afford.
    Joe´s last [type] ..Driving at Senior Age and Finding Low Car Insurance Premiums

    [Reply]

  17. bryansam138 Says:

    This site is very goog. It is great site because it is helpful site. I love this site.
    bryansam138´s last [type] ..Guide to VA Home Loans – Why Apply for a VA Mortgage?

    [Reply]

  18. bryansam138 Says:

    You are my aspiration , I possess few web logs and very sporadically run out from to post .
    bryansam138´s last [type] ..Guide to VA Home Loans – Why Apply for a VA Mortgage?

    [Reply]

4 Trackbacks For This Post

  1. Friday Roundup: Credit Karma & Housing Market News | Credit Karma Blog Says:

    [...] Friday all! We have more from the housing market front, including a young home buyer’s mortgage primer for 20- or 30-somethings interested in buying their first home, how to get a mortgage for modest [...]

  2. A young home buyer’s mortgage primer. « The Life Dreams Blog Says:

    [...] you are considering buying your first home, this is a good article to get a quick overview of what you need to know about mortgages. Thanks to our friends at My Life [...]

  3. Friday Roundup: Credit Karma & Housing Market News | Credit Karma Blog Says:

    [...] A Young Home Buyer’s Mortgage Primer. Everyone knows how to walk into a grocery store and buy bread. Centuries of marketplace development, mass consumer input, and a lifetime of incremental firsthand experience combines to make the bread purchasing process simpler for you than it’s ever been. But as much as your neighborhood market would like you to believe that their prices and their quality are the best in the world, the truth is that there’s still room to apply a bit of sweat equity to the transaction and get a better deal. My Life ROI [...]

  4. Wednesday Roundup: Collecting – Hobby or Money Pit? | Credit Karma Blog Says:

    [...] A Young Home Buyer’s Mortgage Primer “As a guy in my early 20s, I’m getting ready to purchase a home myself, and the fact that I work for an internet mortgage information services company has given me some interesting firsthand experience with the lender side of the transaction.” My Life ROI [...]

Leave a Reply

CommentLuv badge

Welcome to My Life ROI

I'm MLR. After graduating from college debt free, I decided to write a blog encouraging people to adapt responsible and sensible personal finance rules.


If you or someone you know could benefit from learning about personal finance through both my failures and successes, please get my free financial tips.

Advertise Here

Sponsors

Services I Use

Add to Technorati Favoritesypblogs.compfblogs.org logo great nexusMy Life ROI and  - BloggedBlog Directory
Money Hackers Network