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A majority of homebuyers can’t afford to pay for a home outright.  Instead, they will need to qualify for a mortgage, or home loan. Home purchases are made up of three key components: down payment, monthly mortgage payment, and closing costs. And, with several types of mortgages available, unprepared homebuyers might be overwhelmed with their options. We want you to make informed decisions, so let’s explore and simplify mortgages!

Three Key Components

1. Down Payments: This is the amount of cash you’ll need to bring to the home purchase. A typical down payment total ranges between 3% and 20% of the home’s price. Making a 20% down payment has some advantages, like avoiding the added costs of Private Mortgage Insurance (PMI), a lower loan total, and lower monthly mortgage payments. There are also several home buying programs that make homeownership more accessible even if you don’t have a large down payment saved up.
2. Monthly Payment: These payments occur each month and include the principal amount owed, the interest accrued, and any applicable costs associated with property tax or homeowner's insurance for escrow.
3. Closing Costs: These fees typically account for 1% to 3% of the overall cost of a home and can include processing fees, title fees, local government fees, and recording the deed. Some of these closing costs and fees can typically be rolled into your mortgage loan, but you may also be able to split them with the seller.

Saving for a Down Payment

Though you are not required to put down 20%, there are plenty of reasons to put down as much as you can afford.

• Shorter Loan Term Options: A larger down payment may offer you a shorter-term mortgage, such as a 15-year loan, which can save you thousands of dollars in interest over time.
• Immediate Home Equity: By putting more cash down upfront, you immediately start off with more equity in your home, which can provide a financial cushion and greater flexibility if you need to tap into that equity down the road.
• Better Loan Approval Chances: Lenders may view you as a less risky borrower when you have a large down payment. This can improve your chances of getting approved for a mortgage, especially if your credit score isn't perfect.

Down payments are a long-term savings goal, which means the sooner you can start saving, the better off you’ll be. Breaking this goal down into more manageable steps can make this process more achievable.

• Choosing the Right Savings Solution: If saving for a down payment is a 5-year goal, utilizing a high-yield savings account or share certificate can guarantee higher earnings on your funds than a traditional savings account while removing the risk that comes with investing. At First Harvest, we offer a competitive yet flexible Growth Savings Account and limited-time Certificate Specials that can help you achieve your goal faster!
• Pay Down High-Interest Debts: If you have high-interest credit card debts, prioritize paying them off before you go all in on saving for a down payment. The interest you're paying on credit card debts often far exceeds what you'd earn in a savings account. Reducing these debts will save you money in the long run and can improve your debt-to-income ratio, making you a more attractive borrower when applying for a mortgage. A First Harvest personal loan offers an affordable debt consolidation option with budget-friendly repayment terms, so you can simplify your payment and get out of debt faster!
• Save Consistently and Generously: By making saving a habit, you’ll be able to reach your goal sooner than you think. Setting up an automatic transfer from your checking to your savings account each month means you can make that payment without fail. If you’re able to, taking the funds you receive as a tax refund or holiday work bonus and adding them to your nest egg can help make significant boosts towards achieving your down payment goal!

Fixed-Rate vs. Adjustable-Rate Mortgages

Two of the most common types of mortgages are a fixed-rate mortgage and an adjustable-rate mortgage (ARM). Fixed-rate mortgages have the most predictable monthly payments and a consistent interest rate and that offers either a 15- or 30-year term. For example, if you choose to take out a $250,000 fixed-rate mortgage with a 30-year term and 6% interest rate, your approximate monthly payment would be $1,500. When choosing the term that best suits your needs, you should consider a few things, like the total home cost, your available monthly budget, and tax deductions for interest paid.

A longer term allows you to purchase a more expensive home at a lower monthly cost, while a shorter term means a higher monthly payment but a faster payoff period. Selecting a term that fits your monthly budget and home needs should be your main priority. Mortgage interest is also tax deductible. A longer term would offer a higher federal tax benefit compared to a shorter term for the same-priced home. For example, in the 28% tax bracket, the federal tax benefit would be around $81,000 over a 30-year loan, while it would be just $33,000 for a 15-year loan on a $250,000 home. Though you may benefit with a longer-term mortgage when it comes to taxes, you will end up paying much more in interest expense overtime compared to a shorter-term mortgage.

An adjustable-rate mortgage will have an interest rate that may change many times over the loan term, meaning your monthly payment will likely change as well. For example, if your interest rate increased from 5% to 10%, your monthly payment on a 30-year $250,000 mortgage would increase from $1,350 a month to $2,200 a month. ARMs are a popular mortgage option because these interest rates tend to be well below the fixed mortgage rates and are guaranteed not to increase for a certain number of years. After that time, the interest rate is adjusted annually to make up for that artificially low fixed-rate period. If you expect to see an increase in income over time, these rate increases can be a smooth adjustment. There are also many uncertainties that can make the varying rates of an ARM risky, including federal interest rate changes, income loss, or unexpected life expenses.

Take a look at our home mortgage loans page to learn more about our personalized financing solutions, view available mortgage programs, and read the answers to some of the most common questions homebuyers have! Our partners at MoneyEDU break down mortgages even further, offer a home affordability calculator, and offer guided courses so you can be informed every step of the way!

In partnership with MoneyEDU