If you’re ready to become a first-time homebuyer: congratulations! Owning a house for the very first time is an exciting step, but we also know it comes with a lot of questions. Questions like: what other costs will be included? Who pays for the inspection or closing costs? How do I figure out which financing option is best for me?
As Central Texas’ hometown bank for over 130 years, we’ve helped lots of first-time homeowners like you navigate the often confusing home-buying process. Below, find a helpful guide about the real costs of buying a home and the most common financing options that may be available to you.
What Up-Front and Long-Term Costs Should I Expect?
The true cost of a home includes more than just the “sticker” price. Learn what other costs you’ll be responsible for as the home-buyer:
- Down Payment: Most 30-year loans require 20 percent down to avoid paying PMI (private mortgage insurance). To put this in perspective, if one were to purchase a $170,000 house in Waco, about the median price, $34,000 down would be required. Choosing to put less down (say, 10 percent, or $17,000) would require private mortgage insurance, a fairly small expense (less than $1,000 a year).
- Taxes: In Waco, taxes will usually be between 2 percent and 4 percent of the home’s asking price (imagine a range between $3,500 and $5,000 for houses between $150,000 and $205,000). Of course, taxes are based on the city’s appraisal; Recently, Waco has been aggressive in reappraising houses every year in order to take advantage of increased prices and housing demand while helping ensure that homeowners’ appraisals and property taxes are as fair as possible.
- Insurance: Homeowners’ insurance (assuming there aren’t idiosyncratic features of the property) will generally cost between $60 and $80 a month.
- Other Costs (Inspection, Closing Costs, Homeowner’s Association Fees, etc.): The buyer is required to pay for inspection and other closing costs associated with the loan, usually worth 2 percent or so of the price of the house. As Waco has a lot of newer housing stock, homeowner’s associations are also prevalent in many areas, with costs ranging from $400 a year to more than $1,000.
How these costs impact your mortgage payment: Your mortgage lender will generally roll all costs associated with both taxes and insurance into a loan with a down-payment; this is usually an easier way of managing these expenses compared to the other options. So, take the example given above: a $170,000 sale price minus 20 percent down leaves you with an approximate loan amount of $136,000. Let’s assume $3,500 a year in property taxes and a 4.5 percent interest for 30 years (see below for more details on mortgage options), plus $75 of insurance a month. The loan costs $689 a month, taxes are $292 a month, and insurance is about $75 a month. Hence, the monthly amount of the loan would be $1,056 a month.
How Do I Finance These Costs?
Understanding your financing options, and which one to use, is a large part of a successful closing. These options for your new home can be organized into several categories, in which two options are available. With respect to interest rates, you can get either a fixed-rate or an adjustable-rate mortgage. Government-insured loans (through the FHA or VA) are available in instances where one only has 5 percent to put down as a down-payment (FHA) or for veterans (VA). Finally, there are jumbo loans (for investment properties primarily) versus regular loans. Each of these three categories is reviewed briefly below:
- Fixed vs Adjustable Rate: The fixed rate loan scenario was presented in the example above of mortgage financing; you obtain a 15-year or 30-year loan and the payments over the life of the loan remain the same. While the 15-year loans have higher payments because of their overall shorter term, the loan payments will be lower over the entire term because you will have paid the house off in half the time. In an adjustable-rate mortgage, most loans (say, a 5/1 adjustable mortgage) will retain their original interest rate for five years, then adjust according to the movement of a chosen index rate + a premium (right now, the most common rate used is the 1-year LIBOR).
- Jumbo vs Conventional: A jumbo mortgage is a mortgage that is higher, cost-wise, than the amount that can be insured by Freddie Mac/Sallie Mae, which is currently $484,350. They differ from conventional loans in many ways, although (as the subprime mortgage crisis recedes further into the past) they are gradually losing some of these differences. A greater proportion of jumbo loans are adjustable rate mortgages; however, for those that aren’t, interest rates are now comparable to those of conventional loans. Jumbo loans are also used often for multiple-unit investment properties.
- FHA/VA vs Conventional: FHA financing is available for owner-occupant properties and allows individuals with limited down-payment funds to use as little as 3 percent down to purchase a home. VA (for Veterans Affairs) loans are a similar program available exclusively to veterans. USDA loans provide a no-down-payment incentive to assist those who wish to purchase homes in a rural area. See Consumer Finance Protection Bureau for more information about these loans, or speak with a TFNB representative, who (knowing the local area) will have a good idea about what houses, for example, would be eligible for a USDA mortgage.
In addition, there are many federal, state, and local programs available to help potential new homeowners purchase a home. Read more about them through these links, or talk to the friendly and knowledgeable mortgage loan officers at TFNB.
- City of Waco
- Texas Department of Housing and Community Affairs
- First-Time Homebuyer Grants and Programs
- Department of Housing and Urban Development
I Think I’m Ready To Buy. Where Do I Start?
When you’re ready to put down roots in Waco, McGregor, or the surrounding Central Texas area, let our expert TFNB mortgage team be your friendly and strategic home-buying partners!
Contact our mortgage team today for pre-approval, consultation, or simply to talk through mortgage options, home-buying in Waco, or your home-buying goals. As Your Bank for Life, we are here to help you with every stage of your life and finances — especially the purchase of your very first home.
Jason Lavender is SVP of Strategic Initiatives at TFNB- Your Bank for Life. TFNB is a 130-year old organization serving thousands of customers in central Texas. It is the oldest national charter in McClennan County and the seventh oldest in the state of Texas.