My girlfriend and I are considering buying our first home. Neither of us have stellar credit, but we both have reasonable incomes ($40k each) and are nearly debt free. We’ve received online mortgage quotes of 7-8% fixed rates. Based on what we’ve seen online, that looks very high. We assume it’s because we’ve both had credit problems in the past.
We are currently renting a two bed two bath condo, for $700 a month with all utilities included. The homes we are looking at are around $100k, with $3,600 a year in city taxes. We are looking at three bedrooms with two baths on quarter acre lots. Schools are good, and crime is low in the area. Most residents are working professionals.
With a 7% fixed rate, 30 year mortgage, we’d pay about $599 a month. Taxes would add another $266, and then we’d have insurance and utilities to add on. All told we’d pay well over $1,300 a month for the house.
It seems like a lot of money for an extra bedroom and a yard. Maintenance costs, and home upkeep will be a few thousand dollars extra a year as well. We do understand the long term benefits of home ownership, and do want to buy. But we remain concerned over the high interest rates.
Our question is if it is better to wait on buying a home until a few years from now when our credit will improve, or if we should buy now with an uncomfortable interest rate and try to re-finance later?
===ANSWER===
Hi Scott,
Thanks for coming by and sharing your story with us.
As I think about your situation, I do have a few thoughts that come to mind.
How we handle our credit is always first and foremost when thinking of making a major purchase of a home. If the past credit issues are cleared up, in other words you are indeed on track and feel comfortable making a larger payment, then consider this.
Even if your quoted interest rate is somewhat high, if you can get a loan, it might not be a bad idea and buy a house now while prices are low.
I would look real close at the FHA home loan because if you shop around, you should find interest rates lower than what you have been quoted online.
Then, if you get into a home, pay an extra $50 a month on the principal loan balance. This will cause the effective interest rate to be lower because of the savings your create by doing so.
If your income is enough, pay $100 a month and save even more.
When you combine the savings with your house appreciation, you should have a winning combination.
The way I figure it you should save about $46,298 if you have an 8% interest loan.
Here's a mortgage calculator that can help you out. This one uses the bi-weekly mortgage payment example which is about the same as making an extra $50 a month payment.
Wow, what a great question!! I love the idea of putting some extra money down each month on the principle. What a great idea to effectively lower the amount you pay in interest. Thus creating a situation where you are actually paying a lower interest rate.
Understanding how credit scores work is the beginning of the mortgage process. Know your credit scores before you apply for a mortgage. Many free details found on this page.
