Have you ever felt the pressure to become a homeowner? If so, you’re not alone. Even if you haven’t been encouraged into homeownership directly, you may have felt the pressure in subtle ways — from commercials, listening to friends talk about their mortgages and even from driving past those Open House signs on the weekend.
Owning a home with a white picket fence is part of the “American Dream,” after all. The idea that a home is a good financial investment is ingrained in our culture.
And hey, owning a home can be a good thing. But that isn’t always the case.
Sometimes, the pressure isn’t just to buy a home — it’s to buy a lot of home. It can be tempting to buy the most home that you can afford. But only using the maximum amount of mortgage approval offered by the bank as a barometer for knowing how much home you can afford might be more than you feel comfortable spending.
For instance, when reviewing W2 wage earners, banks use gross income. Try running your own numbers with your net take-home pay to confirm the amount you are comfortable paying.
When you approach home ownership, if you’re focusing on the size and amenities of the property rather than what you can realistically afford to pay each month, you may be putting yourself in a precarious financial position. A mortgage payment is one piece of your overall financial puzzle, and can be treated accordingly.
For those asking, “How much home can I afford?” here are four tips to help determine whether your home works within your budget. This way, you can buy a house that helps you work towards your greater financial goals—and not the other way around.
1. Calculating potential housing costs
A good next step is to list all potential housing costs, including your total down payment. You may want to make sure the list is exhaustive and includes property taxes, homeowner’s insurance and any charge associated with your estimated mortgage interest rate, such as an origination fee and other fees for taking out a loan, such as title insurance. It’s typically smart to be generous in your estimates so that you aren’t surprised by higher-than-expected costs.
Also, you may want to make a separate list of expected repairs and updates to potential properties in your budget — both upfront and ongoing. It may be tempting to leave this out of your initial budget, but it’s unlikely you’ll find a place that won’t require some changes and these estimates could play a factor in your decision.
Besides, you’ll want to make your new house a home, and there is nothing wrong with that so long as you’ve budgeted for the estimated expense. You may also want to include moving costs and the cost of furniture in your calculation.
Although these latter expenses aren’t part of your required monthly housing payments, they’re worthwhile to keep in mind.
2. Determining what is paid upfront
Now that you have an all-encompassing list of what you think a potential property might cost, both for a monthly payment and possible expenses, you can divvy up those costs into two categories: Upfront costs and monthly costs.
Upfront costs include things like the down payment on the home and other fees such as closing costs and home inspections. Monthly costs are your monthly mortgage payment which includes property taxes and insurance(s) (if you’re paying monthly), plus other possible expenses you may pay down the line for furniture, repairs, renovations, etc.
You may also find it helpful to have a cash buffer as you go into homeownership, in expectation of the unexpected.
3. Looking at monthly costs in terms of your budget
Now that you have an idea of what your monthly housing costs could be, you can begin to fit those into your overall budget. Does it work —leaving you with some room to breathe? Are you able to save for other financial goals such as retirement? Have you considered ongoing home maintenance? You won’t want to max out your income with your home purchase. Overextending yourself in order to purchase a home is not recommended, and worrying about money after you buy could take some joy out of your new nest.
4. Considering unexpected costs
Being a homeowner can be wonderful and rewarding, but it can also be expensive and exhausting. You may want to set proper expectations with yourself regarding how much homeownership will cost in terms of dollars. Budget accordingly.
Next, you might want to consider what could happen in the event of a job layoff. Even great employees can lose their jobs, so have a plan in the event that this happens.
If you have no plan for how to make a mortgage payment in the event that you or your spouse loses work, you might not quite be ready for homeownership — you may want to build up your cash reserve before making the dive.
For instance, it’s recommended that you save three to six months’ worth of expenses in an emergency fund in case of a job loss, health emergency or other financially difficult events.
Choosing a great mortgage fit
Once you’re equipped with an idea of what you would like to spend and how it fits into your budget, it’s time to shop for a home and apply for a mortgage that best suits your needs.
Throughout this process, you likely have done research on the typical costs involved in taking out a mortgage. You may have even received some quotes from lenders. Once you’ve run the numbers and feel confident about the result, you may be ready to do some serious shopping for mortgages.
When you are ready to choose a lender and type of loan program, you can request quotes in writing from lenders which will include the rate, term, costs and more.
The mortgage Annual Percentage Rate (APR) was established to help make comparison shopping between lenders easier for the consumer, but not all fees related to purchasing a home are included in the APR. Therefore, it’s helpful to request a loan estimate in order to review the breakdown of all the costs of taking out the loan.
You may also want to take into consideration the loan approval and closing timeline expectations in relation to your purchase contract deadlines and consider the customer service reviews of each lender.
Original source: mediafeed.org