Becoming a homeowner is an event that many of us look forward to. But all too often, when it’s all said and done, we suffer from belated sticker shock. Even though lenders have requirements regarding income and debts, we may still end up with more house than we can afford.
When buying a home, it’s crucial to consider our unique financial and life circumstances. Going with the amount that lenders tell you that you can afford is a mistake. These numbers may work as a general guideline, but sometimes they’re just too high.
Here’s a list of things to consider when deciding how much of a house you can afford.
How much debt are you in already? If you have outstanding car loans or credit card balances, this will affect how much you can afford to spend on a mortgage payment each month. As a general rule, your total debt should not be more than 36% of your income. But if you’re not comfortable with that figure, by all means go lower.
How much of a down payment can you afford? There are loans available that do not require a down payment, but it’s best to make one if at all possible. This will reduce the amount you have to borrow, hence reducing your monthly payment. And if you pay at least 20% down, you won’t be required to pay private mortgage insurance (PMI).
What will the taxes on your property amount to? You’ll have to keep your property taxes current to comply with the terms of your mortgage. In some cases, a lender will require you to pay into an escrow account each month to ensure that they are paid. Otherwise, you’ll have to budget for taxes on your own.
Don’t forget about homeowner’s insurance. This is also required by lenders to protect their interest in your property. You may also need more insurance than the lender requires to ensure that you have enough coverage.
Keep maintenance and repairs in mind. When you’re renting, these are your landlord’s responsibility. But when you’re a homeowner, it’s all up to you.
Are you expecting any changes in your income in the future? If you plan to start a family, you may have to deal with lost income during maternity leave. You’ll also have higher expenses with each new addition. This and other changes in your situation could leave you with less money to put toward mortgage payments.
What are interest rates like? When interest rates are high, the amount of home one can afford goes down. When they’re low, it goes up. If you’re on the borderline and interest rates are high, consider waiting until they drop before buying.
When becoming a homeowner, it’s easy to get carried away and spend more on a home than you can comfortably afford. But if you do, you’re setting yourself up for financial difficulties in the future. Knowing what you can afford to pay for housing each month, including expenses such as taxes, insurance and maintenance, will help avoid unpleasant surprises down the road.
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For many people, owning a home is something that they hope to achieve one day. Being a homeowner gives one a sense of accomplishment, and it offers more freedom than renting. But there are certain expenses that can stand in the way of owning one’s home. One of the biggest is the down payment.
In years past, lenders almost always required a down payment of at least 20% of the purchase price of a home. This requirement was a major obstacle for many would-be homeowners. For a home that sold for $200,000, they would have to come up with $40,000 up front. It would be nice if we all had that much money sitting around, but few people do.
Today there are programs that allow home buyers to make smaller down payments. Some mortgage programs for first-time home buyers make it possible to buy a home with nothing down. Others require a down payment of as little as 3%. This has opened the door for those who otherwise could not have afforded to buy a home to do so.
Still, there are advantages to making a larger down payment on your home. Here are a few to consider:
* A larger down payment will give you equity in your home from the start. If you pay little or no money down, it can take years to build up any equity.
* The higher your down payment, the lower your monthly payment will be. Not only will the amount of principal be smaller from the start, but you’ll also be able to avoid paying private mortgage insurance (PMI) each month if you pay at least 20% down.
* A large down payment may qualify you for a lower interest rate. The higher amount of your mortgage loan, the larger the risk the lender is taking. Making a sizable down payment is a sign of financial stability and it lowers the amount of money you’ll need to borrow, so a lender has incentive to offer a more competitive interest rate.
There’s no universal down payment amount that is best for everyone. Some home buyers don’t have a lot of money saved up, but they can afford to make their payments each month. In such cases, it’s best to take a careful look at your finances and determine how much you can afford to pay down. Even if you qualify for a mortgage with no money down, paying as much as you can up front will work to your advantage.
Not everyone can afford to make a 20% down payment. And with the programs are available today, you don’t necessarily have to. But it’s not necessarily a good idea to get a mortgage without making a down payment at all. It may save you money in the short term, but it will most assuredly cost you more in the long run.
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Owning a home has long been a major component of the so-called “American Dream.” It’s true that home ownership is fulfilling and liberating. But as anyone who is making mortgage payments can tell you, it doesn’t come cheap.
During the good economic times, banks practically handed mortgages out like candy. This made owning a home accessible to more people, but it also led to an alarming number of foreclosures. Today, more consumers than ever before are aware of the pitfalls of buying more home than they can afford.
The amount of home an individual, couple or family can afford depends on a number of factors. These include:
* Income ? Most prospective home buyers are aware that their income plays a significant role in how much home they can afford. Simply put, if you don’t make enough to pay your mortgage payment each month, you can’t afford the house. If it were as cut and dried as that, settling on a price range would be relatively easy. But there are more things to consider.
* Down payment ? A key factor in how much home you can afford is how much of a down payment you can make. Most conventional loans require a down payment of 20% of the purchase price. That’s not an amount that most people can save up in a few months’ time. Some types of loans allow for a lower down payment, or even none at all. But in exchange for that concession, you’ll have to pay private mortgage insurance (PMI) and possibly a higher interest rate.
* Other debts ? All other things equal, two borrowers who have different amounts of debt will need housing in different price ranges. Most experts agree that your total amount of debt should not exceed 36% of your income. So while someone with no other debts could afford to spend the entire 36% on housing (although that’s not recommended), someone with a 15% debt-to-income ratio could only afford a mortgage equal to 21% of his income.
* Interest rate ? When interest rates are low, one can afford a larger mortgage than when they are high. This is something over which we have no control. But if you are considering buying a home and interest rates are lower than the norm, moving forward now instead of waiting could be to your advantage.
The 36% debt rule is known as your back end ratio. Your front end ratio is also worth considering. This rule dictates that your mortgage payment and other housing expenses, including homeowners’ insurance and real estate taxes, should add up to no more than 28% of your gross income. This makes for a quick way to estimate how much of a mortgage you can afford. Simply multiply your monthly income by .28 and you’ll have a rough idea of how large of a payment you can afford each month.
Living within one’s means is always important, and that’s especially true during uncertain economic times. Taking the time to carefully consider how much you can afford to spend on a home could save you a great deal of anguish in the future.
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