First Home? Here Are 7 Tips on How To Take Out a Mortgage Without Hurting Your Finances

Nicole Spector
Feverpitched / iStock.com
Feverpitched / iStock.com

When it comes to housing, you have two options: rent or buy. Millions would prefer to buy, but stick to renting because it’s more financially feasible, and understandably so. Home prices across the U.S. are soaring, with the National Association of Realtors (NAR) determining that prices for existing single-family homes increased in more than 85% of the 221 markets NAR tracked in the fourth quarter of 2023.

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Part of the challenge that comes with buying a home is the mortgage process, which everyone, aside from those who pay for a house in all cash, have to go through. If you make any number of wrong moves when taking out a mortgage, you could put your finances in harm’s way. For example, you may borrow more than you can afford to pay back, with interest, over time.

What are seven tips on how to take out a mortgage without hurting your finances? Mortgage experts gave us the scoop.

Review Your Budget To Determine How Much You Can Afford

Before you embark on buying a home, review your budget to determine how much you can afford not only for a down payment but for a monthly mortgage (remember to factor in interest and property taxes). If you overestimate your budget, you’ll risk harming your finances.

“Your monthly payments towards the mortgage will consist of principal, interest and taxes (sometimes it will include property tax — not always),” said Chris Allard, mortgage broker at Chris Allard Mortgage Team. “The principal pays down your loan amount, while interest is the cost of borrowing, which is set previously by your rate. Taxes are collected by the lender to be paid to the municipal government and are usually paid within the mortgage payment.”

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Factor In Homeowners Insurance and Mortgage Insurance

You’ll also want to factor in homeowners insurance and mortgage insurance, the latter of which acts as an additional layer to protect your lender, in case of an emergency that financially drains you.

“The bottom line is that these factors contribute to your monthly payment and will have to be accounted for when assessing your budget before house hunting,” Allard said.

Make Sure Your Credit Is in Stellar Shape

If you want to ensure a smooth borrowing process that won’t break the bank, you’ll want to have a high credit score. Good credit also gives you a competitive edge with lenders.

“Your credit score is like your financial handshake,” said Matt Dunbar, SVP of the southeast region at Churchill Mortgage. “It tells lenders you’re trustworthy. A better score can snag you lower interest rates, saving you a lot of money over time. Keeping on top of bills and managing your debt well can really pay off when it’s time to get a mortgage.”

Get Preapproved for a Mortgage

Dunbar likens a mortgage preapproval to “a golden ticket when you’re house hunting.”

“It tells you how much you can actually spend and shows sellers you mean business,” Dunbar said. “You’ll need to share some financial details up front, which can help catch any issues early on.”

Save as Much as You Can for a Down Payment

The higher your down payment, the better chance you have at securing a lower-interest loan. Plus, a fat down payment means you’ll reduce your mortgage payments as well.

“The larger the down payment, the better because it reduces the amount of your overall loan, and if you hit the 20%, you save on mortgage insurance premiums,” Allard said. “Additionally, the consequence of a smaller down payment is a higher monthly payment because the loan amount is larger.”

Look Into Down Payment Assistance Programs

“As a first-time borrower, I also recommend you look into down payment assistance programs,” Allard said. “There are many different options for first-time homebuyers when it comes to down payment assistance.”

For example, you may consider a shared equity mortgage program, which provides lower mortgage rates for first-time buyers who aren’t brimming with cash.

“In this scenario, the government offers 5%-10% loans of the home’s purchase price, wherein you pay back the same percentage of the value of your house within 25 years or upon sale,” Allard said. “The stipulation is that if the value of your home increases, so does the amount repaid.

“Other options, depending on your location, include a First-time Home Buyer’s Tax Credit or down payment and closing cost assistance,” Allard said. “A mortgage broker can help you choose the best incentive plan for your position and consider other essential factors, such as the extra costs associated with being a homeowner. Remember to budget rigorously, accounting for your current credit score and potential long-run changes in your life.”

Choose the Right Mortgage for You

Mortgages are not one-size-fits-all. There are different types available and you should be discerning when choosing one.

“Mortgages come in different flavors, like fixed-rate or adjustable-rate,” Dunbar said. “Your choice should match up with how long you plan to stay in the house and how you feel about your payments potentially changing down the line.”

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