I can’t believe it has been 13 years since I started the process of buying my first, and current home. I was intimidated. I didn’t know a lot about the process and I was mostly scared of rejection. For a long time, I didn’t think I would ever qualify. My then significant other and I would drive around, looking at homes with for sale signs in the yard and talk about what we like or didn’t like, but we would always be taken back by the prices.
Then, in April 2007, I found a new home development in the suburbs that seemed like it was in our price range. We went and looked on a Saturday afternoon and liked what we saw. The sales person happened to have attended high school with my significant other, which helped make us feel at ease. In hindsight, we probably should have sought the help of a realtor, but we were naive and only in our mid-twenties.
We went back the next day, Easter Sunday, and decided to take the big leap and go into contract. I wanted to be a homeowner so bad. I rationalized everything, and took the only lot available with the floorplan we could afford. In hindsight, I wish we would have waited for a bigger lot. The next week, we went to the affiliate mortgage company and applied for financing. In order to keep the house under contract, it was required we get approved for financing. An important part of getting a mortgage is to have a property picked out. Without it, you can only get pre-approved, which is a good way to see how much home you qualify for, but is not that same thing.
We didn’t know much about the types of mortgages available, so we went with what the loan officer said was the best for us. In hindsight, a 7/1 adjustable rate mortgage was not the best pick. Payments were interest only for seven years, with an adjustable rate, then reset at regular payments for the remaining 23 years. Five percent of the home price would be our down payment and 15% would be from a home equity line of credit (HELOC). Prior to the 2008 financial meltdown, people could avoid private mortgage insurance (PMI) by financing this way, because the first mortgage was only 80% of the value.
I believe these types of loan packages are a thing of the past (thankfully!). I recommend a 15 or 30 year, fixed rate mortgage, with no points, unless someone else is paying those for you. Points are prepaid interest that lets you buy down the rate so your payment is lower over the life of the loan. Always do a break-even analysis with any type of refinance and see how long it will take to recoup the savings versus the higher rate. If you are not planning on staying in your home longer than the breakeven point, then don’t spend the extra money and refinance or pay points. To understand more about the different types of mortgage programs, visit this Bankrate page.
Once approved, we didn’t have a locked interest rate because our home was not slated to be completed for over four months. Eventually, in June, we were able to lock our rate and know better what our monthly payment looked like. At the same time, we were saving for our down payment, which back in 2007, was allowed to be stated, and not verified, as long as you had that amount by the time you closed. Of course we made it and bought the house, rode the value down and in 2012 was able to refinance to a fixed-rate, 30 year loan, at 1/3 less interest. This was made possible by the HARP program, which allowed people to refinance underwater mortgages that were at a higher rate or part of a sub-prime loan such as the one we were sold.
The lesson I learned is to always do your homework by understanding the different options available. If you don’t qualify for a financing option you want, make sure you understand the reason. If you feel uncomfortable with a mortgage officer, or company, then step away and call some other companies. Also, remember that you are the customer and they want to sell you a loan because if not, they don’t get paid. If you don’t qualify, or don’t feel good about the deal, chances are you will regret it. Speak up and be your own advocate, and if you have an elder family member or friend who has been through the experience, don’t be afraid to ask them to sit with you, or at least look over the deal. You can buy your first home, but make sure it is planned out well, or your home might own you and limit your life outside of making your monthly payment.
Do you have any home financing nightmares to share? Leave a comment!