(How To Find The Perfect Home For You and Your Budget-Series)

In this 8 part series, we’ll walk you through the steps Utah first-time home buyers need to take to secure the best mortgage. Instead of focusing on the price of the home, this approach emphasizes monthly affordability and other key financial factors.

Why Traditional Home Financing Might Lead to Regret

Many buyers start by deciding on a home price before talking to a lender. They think about buying a $500,000 home, then start looking at homes in that price range. While this seems logical, it can lead to frustration and poor financial decisions. If you start this way, you may end up overstretched or with the wrong home.

Four Steps to Getting the Right Mortgage

Following these four steps will ensure you’re financially prepared to buy a home and avoid regrets later.

Step 1: Decide Your Comfortable Monthly Payment First

Before meeting a lender, decide what you want to pay monthly for your home. This should include taxes, insurance, and any HOA fees. Don’t start by asking how much you can afford—lenders often approve you for more than you’re comfortable spending. Focus on what you feel good paying each month.

Step 2: Determine a Realistic Monthly Payment Range

Typically, it’s recommended that you spend around 30% of your income on housing. In Utah’s market, this might differ slightly, but it’s a good benchmark. Compare your expected mortgage payments with your current rent to help set a reasonable target. Monthly budgeting makes it easier to comprehend affordability, especially with potential HOA fees added in.

Step 3: Decide How Much Cash You Can Spend

Next, think about how much cash you can use for the purchase. This includes your down payment and closing costs. Be realistic about your resources. Will you receive a gift from family, or use a 401k loan? Be aware that closing costs usually run 2.5-3% of the home price, so set aside funds for that, not just the down payment. You don’t always need 20% down—there are first-time buyer programs in Utah that help reduce PMI costs.

4. Carefully consider options if you need to pay points to get a lower interest rate.

Your lender may tell you that if you pay one point, your interest rate will be lower than if you pay zero points. And even lower, if you pay 2 points. 

A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000).  So points are basically an “upfront payment of interest” at closing for usually 30-year fixed loans. Rather than pay it over the life of your loan, you can pay a large chunk when you get the loan. 

As a buyer, you will need to weigh the pros and cons for paying for points upfront.  You may not want to pay the points if you plan on living in the home for less than 5 years. You’ll never recoup the costs of your upfront payment over the life of the loan even if lower monthly payments may seem tempting. 

If you plan to live in your home for many years or interest rates go up. The benefit of the lower rate will kick in and save you money in the long run.  

5. Watch out for hidden fees or additional costs along the way.

• Don’t be fooled by advertised rates! Behind that rate could be a long list of fees, points, or closing costs. Ask the lender to break down the fees and give you the total amount for closing the loan.
• Avoid penalties for lock-in extensions. Some lenders will increase your interest rate slightly if you need to lock in your loan for 60 days or more. Make sure you know any requirements before signing any paperwork. It’s another reason to get all of your finances and paperwork in order before you apply for a loan.
• Review fees for FHA loans. Don’t always assume a FHA loan will be cheaper or better. Not only do you pay an upfront premium for mortgage insurance (1.75% of the loan amount), but you’ll also pay a recurring annual cost of up to 1.35% of the outstanding loan amount (added to the monthly payment) for the life of the loan. Review the pros and cons of these loans carefully. However currently, FHA interest rates are lower than most conventional loans. Even though you are paying mortgage insurance, you may save more money in the long run.
• Mortgage disclosure forms have been simplified.  They do a much better job of disclosing a loan’s terms and cost to borrowers. Make sure you carefully review the Loan Estimate. You are given three business days after application, and the Closing Disclosure, given three business days before closing.

You’re off to a great start now that you know the best way to go about financing your first home. Now it’s time to show you how your budget, location, and your criteria for a home  come together as a “roadmap” in your search for the perfect home. Next week’s article, Putting It All Together explains how these three factors are intertwined and will lead you to your new home!