Home Loans and Why Saving is Key

posted 9/16/2015 in Mortgage

Buying your first house and why saving is key to a home loan

If you have started to think about buying your first home, it’s fun to jump on popular home shopping sites like Zillow, Trulia, or Realtor.com and start dreaming about master bathrooms and finished basements. But how will you actually pay for that dream home? Before you get too serious about shopping for your first home, let’s talk money.

Unless you have $200,000 sitting around (or have a money tree in your backyard), most people will need a loan to purchase their first house, also called a mortgage. There are many different types of mortgages, but there is one key component that will play an important part in almost all of them: how much of your savings are you willing to use as a down payment? 

If I can get a loan to buy a house… why do I need savings?

Banks or other financial institutions typically base your interest rate off of the amount of money you are willing to put towards your home. The more money you put down, the less money the bank will have to invest in your home. Because they do not have to put forth as much money, they are taking on a lower risk, which typically means you'll receive a lower interest rate. Most banks like to see you put down 20% of the total cost of the house (or $40,000 for a $200,000 house). Yeah, we know…that’s a significant amount of money... so before you throw up your hands and sign a ten-year lease, know that there are several options, especially for first-time home buyers, which may require less of a down payment.

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What if I don’t put 20% down?

Enter PMI. Private Mortgage Insurance or PMI is an insurance policy for mortgage lenders and is required when the full 20% down payment is not made. And no, this isn’t the insurance that protects you when a tree falls on your house. PMI is an insurance that will pay the lender if you are not able to repay your loan. Typically, PMI is added into your monthly mortgage payment and is $30 to $70 per month per $100,000 borrowed (Zillow). So if you borrowed $190,000, you could pay around $95 per month for PMI. Thankfully once you have reached 20% equity in your home (only owe the bank 80% of the total cost), you may no longer need to pay PMI. Make sure to check with your mortgage servicer for eligibility.

Here's the point though… saving is key! The more money you can put down up front, the more you can save over the term of your loan. Your monthly payment will likely guide a lot of your mortgage decisions. Having a comfortable monthly mortgage payment is crucial, so you will want to find out what types of loans you qualify for and therefore how much you’ll need to have saved!

 If you’re unsure where to start, one of our experienced home loan experts would be happy to help. Get a free consultation where we’ll help walk you through the home purchase process and let you know your different options. Don’t worry, this is not a commitment, we’re simply here to help. Or if you don't think you're ready to talk to one of our experts, subscribe to our email series, The Path to Ownership, to learn what to expect when buying your first home!

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Lincoln Savings Bank, Member FDIC.

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