Well, you didn’t know it, but you’ve been preparing for it for the past few weeks…a first time homebuying quiz!
If you’ve been keeping up with my FAQs, you’ll know there are a lot of questions to be answered when considering buying your first home. What you may not have realized, though, is how much you’ve actually learned about the process just by asking those basic questions! You actually know a lot about first time homebuying now, I’m willing to bet…if you’re willing too, why don’t you put your skills to the test by taking the quiz!
This quiz is a great little benchmark test to see if you’re confident enough in your knowledge to begin the process of buying your first home, and at teasing out what areas you’re still uncertain about in order to get the help you need.
If you want to brush up on your first time homebuying FAQ topics before you take the quiz, check out my blog posts on mortgages, qualifying, budgeting, knowing when it’s time, and what type of house to buy.
Now, of course, you can always skip the quiz and just call or email me to set up a meeting – together we can determine whether you’re ready to buy a home in the Main Line area, or, if you’ve already decided, I can help you get started! But hey, quizzes are fun, and there’s no harm giving this one a go!
First Time Homebuying Quiz
What is a mortgage?
A mortgage is any loan you take out using your home as collateral. This distinction is important, because this doesn't just include the loan you take out to buy the home initially: You can take out something called a second mortgage to pay for something else, but tell the bank that if you can't pay it back, they can repossess and sell your home to get back the money.
What do you call a mortgage where the interest rate is set when you originally take out the loan, and will not change over time?
It's called a fixed rate mortgage.
What is a mortgage that is tied to an index and a margin?
A mortgage that is tied to an index and a margin is called an adjustable rate mortgage, or ARM. The index is the national interest rate, and the margin is the percentage that the lender charges for the loan.
What does it mean to have a 5/1 ARM?
A 5/1 ARM means that for the first 5 years of the mortgage, the rate is fixed and does not change, and every 1 year after that, the interest rate is recalculated.
What does DTI mean?
DTI means Debt to Income ratio. To find this, you take your amount of monthly debt and divide it by your gross monthly income. The resulting percentage will determine how easy it is for you to qualify for a mortgage. Most lenders would like to see a DTI of 40% (.40) or less; Government lenders will sometimes allow 50%.
Ideally, how much money should you have saved up before you buy a home?
Ideally, you want to have around 20% of the cost of your home saved to put as a down payment. This isn't always the case, however: Conventional loans now offer 3% down programs, if you pay for Private Mortgage Insurance along with the loan. Additionally, if you go with a government-backed loan instead, you may also only need a 3.5% down payment, or none at all if you're a member of certain qualifying groups.
Closing costs are usually how much of a home's total value?
Closing costs often make up about 5-7% of a home’s total value, so on a $300,000 home, closing costs could be anything from $15,000-$21,000.
Around how much should you aim for your monthly mortgage payment to be?
You should aim for your mortgage to be around 30% of your gross monthly income. This number is subjective, depending on other factors: It might be lower, if you're buying a temporary home, it might be beneficial to be a bit more conservative to save money for a more permanent residence; If you know your salary will be able to cover it in the future, you might want to stretch that budget in order to buy bigger a home for you and your family to grow into,
What's the biggest difference between renting and buying?
The first three answers are all technically correct, but the biggest difference between buying and renting is who your money goes to. When you buy a home, you're making an investment. As the value of the home goes up, so does your equity in it, so when you pay your mortgage, it's almost like you're paying yourself. When you're renting, you're paying your landlord's mortgage.
Which is better: New construction or an existing home?
The answer to this question completely depends on your goals. The positives in the first two answers are both technically true: You just have to decide what's important to you.