What To Do?

"Matt, we're buying our first home in June. How do we get the whole process started?"

Congratulations!
Buying a home (especially your first) is an extremely exciting time. Many times, it is a roller coaster process as you find the perfect home, make an offer and obtain financing.

1. Establish a Budget & Get Preapproved. I would run numbers based upon a 6.5% interest rate. Rates are lower than that right now, but we're still 6 months out. Establishing and remaining within your budget is vital! When you are preapproved, find out when your rate will be locked.
2. Find a Realtor. Typically, references are the best resources. Know anyone who has purchased a home recently and had a great experience? Make sure that your Realtor treats this purchase as an investment.
3. Start shopping. Take notes to remember each property. As you narrow down your choices, have your Realtor pull some comparable sales in the neighborhood to make sure that you're getting into a sound investment.

“Should we put money down? If so, how much?”
I'm not a financial investor and won't pretend to be one. However, some basic financial principles need to be applied.

I would start with 3% down in order to qualify for FHA financing. You'll obtain great rates & will lower your mortgage insurance premiums. The more money you put down, the lower your mortgage insurance payments. However, mortgage insurance is only required on homes whose financing exceeds 80% of the value. For that reason, I would not recommend putting more than 20% down as it will not improve your financing. Conservative investments offer returns that exceed the 6 – 7 % mortgage rates so reducing your principle may not always be the wisest investment.

There is one big problem when you pay down your mortgage. Liquidity. Once additional payments have been made, your monthly payments do not change. Should you run short on cash, the bank will not float your payments for 30, 60, or 90 days, they will begin foreclosure proceedings. Ugh.

Always have a plan for a worst case scenario. If you do decide to put additional money towards principle, obtain a HELOC first. This line of credit will provide the necessary liquidity while allowing you to accelerate the pay off. This is a win, win. You have access to your equity & you will reduce the amount of time you are exposed to the interest rate, thereby reducing your effective interest rate!

Hope this helps! Happy home buying!