If you are at a point in your life where you are ready to quit paying your landlord's mortgage and instead pay your own, there are several important pieces of information about buying your first home that you need to know. Since buying your first home is typically one of the most expensive investments you will ever make and you will probably live in your home for many years, the following facts will be crucial to consider.
#1-You Should Always Have A Down Payment
If you do not provide a down payment, you will accrue additional interest over the years since a larger amount of money is being loaned. In fact, just being approved for the mortgage is often more challenging when you have a small or non-existent down payment. That is because the down payment gives you equity in the property. When you have that equity, it means that if the value of your home drops in the future, you are less likely to owe more than what the value of your home is worth.
#2-Not Having A Down Payment (Or A Small One) Will Usually Mean That You Need A Special Type Of Insurance
Some lenders will allow you to buy a new home without a down payment or when you have less than 20% of the of the value of your home to put down. However, doing so will typically result in the lender seeing you as more likely to default on your home at some point in the future.
In that instance, you will usually need to provide private mortgage insurance, which is also known as PMI. PMI pays the balance of your loan if you were ever to default on your payments. You will need to pay that extra expense until you have reached the point where you have paid off 20% of the value of your home at the time that you bought it. When that happens, you can request for it to be dropped, as explained below.
#3-PMI Does Not Have To Accrue For The Full Length Of Your Loan
Unless your loan has been guaranteed by the government, you will almost always be required to pay the PMI until you have paid 20% of the value of your home at the time that the loan began. When that occurs, you can request that the lender drop the insurance.
If you do not ask at that time, your lender is required to cancel your PMI policy when you have paid 22% of the original value, excluding interest. However, with some loans, you may need to refinance when you hit those numbers.
It is also important to know that in order to be able to drop the PMI at that point, you must:
Be in good standing with the lender
Not have had any 30 day late payments within the last 12 months
Not have incurred any 60 day late payments in the last 24 months
Ask for the PMI requirement to be removed in writing
In conclusion, it is very important to be as well-informed as you can be when you are buying your first home. Therefore, it will be beneficial to consider the above information when you are making the necessary plans and looking at homes for sale.