The housing market is still going strong and millennials are a big factor.
Total mortgage application volume surged 25.5 percent on a seasonally adjusted basis for the week ending Oct. 2 compared to the previous week, according to the Mortgage Bankers Association. Applications to refinance and to purchase homes are now at the highest level in five years.
Millennials represent the largest share of homebuyers, according to an analysis by the National Association of Realtors. Nearly one-third of all homebuyers, and 68 percent of first-time buyers, were 34 or younger last year. (Tweet This) And those numbers are expected to grow.
Buying your first home or know someone who is? Here are three common, and potentially costly, mistakes to avoid.
Mistake #1: Overestimating what you can afford.
Real estate brokers say first-time buyers often focus on the down payment and monthly mortgage amount when calculating how much they can afford and forget to factor in closing and other costs.
"They get to the closing and they're shocked by the amount of money they have to pay," said Vicki Fillet, certified financial planner and president at Blueprint Financial Planning in Hoboken, New Jersey.
It's important to remember too that monthly payments include not just the mortgage, but interest, taxes and insurance—something that buyers can often forget when figuring out their budgets.
It's a good idea to get pre-approved for a mortgage loan so you know how much a bank is willing to lend you before you make an offer on a home. But keep in mind that the amount you're pre-approved to borrow from a mortgage lender may be more than you can actually afford once you factor in taxes, insurance and other costs like condo or homeowners' association fees and maintenance.
As a general guideline, your total monthly payment (including mortgage principal, interest, real estate taxes and homeowners insurance) shouldn't exceed 28 percent of your gross, or pretax, income.
While some sellers are still asking for 20 percent down payments, it's possible to pay much less. Mortgage giants Fannie Mae and Freddie Mac announced guidelines late last year for loans with down payments as low as 3 percent under a new program largely aimed at first-time homebuyers. Just remember that the lower your down payment, the bigger your mortgage loan (and the more you'll pay in interest).