Buying a condo or home – especially for the first time – can feel like a daunting task. Where do you begin? How do you know what’s best for your budget? There are many questions to think through before making this decision, especially because buying a condo is a financial and personal milestone.
As you consider taking this next step, read on for our commonly-asked questions – and more importantly, expert advice from our team on all things related to buying a condo for the first time.
An adjustable rate mortgage (ARM) is a home loan that’s divided into two periods: a fixed period and an adjustment period. Unlike a fully fixed-rate mortgage, this type of loan relies on market conditions and can change from month to month during the adjustment period.
- During the fixed period, which comes first, the loan is at a set rate that’s lowered to compensate for any changes that could occur during the adjustment period.
- After the fixed period, the loan during the adjustment period is tied to a benchmark that reflects market conditions.
While ARMs aren’t the right choice for everyone, this mortgage type can be a beneficial option for first-time homebuyers who might sell their home before the adjustment period ends (thus allowing for a lower fixed-period loan). It’s worth discussing both options with your mortgage lender to ensure you’re opting for the one that’s right for you.
Closing costs – or fees incurred during the homebuying process – can be confusing, as they vary by state and individual transaction. While the individual costs themselves can change, they usually fall into one of the following categories: property-specific costs, loan-specific costs, mortgage costs, property taxes and insurance.
Both the buyer and seller of the condo are responsible for paying closing costs, though buyers shoulder the majority of the fees. Generally, a homebuyer can expect to pay for the title search fee, title insurance, attorney’s fee, appraisal fee, recording fees, credit report, termite inspection, lender’s origination fee, insurance, taxes, and interest. Sellers handle part of the title search fee, title insurance, recording fees and the real estate agent’s commission.
The actual closing costs vary by area and transaction size, but you can expect to pay around two to five percent of your home’s purchase price on closing day (when these fees are due). Closing cost calculators can be a great way to determine what the exact amount might be for your condo.
Though condo (and rental) prices fluctuate due to market conditions, the decision to continue renting or purchase a condo for the first time is up to your individual goals and finances. A rent vs. buy analysis is designed to audit these areas of your life and help determine desire and readiness to buy. Steps in this analysis include:
- Use a cost calculator to understand what mortgage you can afford, as well as closing costs, taxes and HOA fees – which should all be factored into the equation.
- Consider your life stage goals, and why you want to purchase a condo. Talking through these questions with a trusted friend or counselor is a great way to ensure that the time is right to take this next step.
- Think about other people, such as a partner or family, who might be involved in this decision. Discuss the implications with them to weigh their opinions, too.
One of the biggest components of a rent vs. buy analysis is what you want and what you can afford. As you look at different price points and their impact on your budget, use your current rent as a starting point for what an affordable mortgage would look like.
As a first-time buyer, understanding mortgage interest rates is critical. This rate is what you pay to the lender in exchange for borrowing money, and there are three types of these loans:
- Conventional loans, which require a higher credit score and a down payment between five and 20 percent of the home’s value. These are not issued by the government.
- FHA loans, which are issued by the government, allow you to put down as little as 3.5 percent.
- VA loans are for veterans and active-duty military personnel, and are guaranteed by the Department of Veterans affairs. They carry no down payment requirement.
These mortgages can be paid on a fixed or adjustable basis, and last 15 or 30 years. The difference between these payout times is that a 15-year mortgage carries higher monthly payments, but lower interest rates – meaning you pay off your mortgage sooner. A 30-year mortgage means that you have more time to pay off the loan with a lower monthly payment – but at the cost of higher interest over a longer period of time.
Property taxes are a hot topic in Illinois, especially in Chicago’s Cook County, where the annual average property taxes are $10,950. While it’s common to think that these taxes don’t apply to condo owners, this is unfortunately not the case – condo owners are required to pay property taxes, even if a property was gifted to you or you own a rental property.
Property taxes are, in fact, determined by a home’s assessed value and the local tax rate (which is 2.19 percent in Chicago). While these taxes can add up, there are tax credits and exemptions that can ease the burden of this cost. Upon filing your taxes, these deductions include:
- The amount paid in property taxes
- The amount paid in the interest on your mortgage
- The amount of any casualty loss to your property to the extent not compensated by insurance
As you consider the cost of owning a condo, property taxes are an important line item to add to your budget. Work with your mortgage lender and realtor to understand exactly what these costs might mean for you depending on your choice of a new home.
One of the biggest changes to mortgage costs this year is that it’s now cheaper to have a lower credit score. Specifically, if your score is 659 and you’re borrowing 75 percent of your new home’s value, you’ll only need to pay a fee equal to 1.5 percent of the loan balance (as opposed to 2.75 percent of the loan balance, which was the fee last year). This change only applies to loans starting May 1, 2023.
While the changes to Loan Level Price Adjustments (LLPAs) can change each year, the easiest way to ensure you’re paying as little interest as possible is to ensure your credit score is in top shape before purchasing a home.
With a mortgage, interest rates, closing costs and property taxes to consider, it’s no surprise that taking the step to own a condo is a huge decision. At Luxury Living, we pride ourselves on working through every step in the process together – ultimately leading you to your dream condo at the right price. If you’re ready to take this step, reach out to our knowledgeable team today or click the link below to get started!
