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Home Buying – How much can you Afford?

 

Many people want to live the dream of owning their own home. Paying rent is a waste of money they say. What you don’t want to happen is to over buy or over extend and turn that dream into a nightmare. Home Buying – How much can you afford?

Owning a home is special and you must prepare accordingly. We will discuss the safe guards you need to put into place to eliminate that nightmare.

Often the concept is I am paying rent now so if I pay the same amount for a mortgage then I will be alright. Well the answer is maybe, maybe not. That all depends on a number of factors.

Our discussion will keep you out of trouble and put you on a solid footing for home ownership.

Preparing for the largest purchase you will make in Your Life

Yes, owning a home is exciting but there are a number of things you need to do to make sure you are successful. What must be first in mind is to make sure you have enough money to buy food and other essential life needs. Be certain you can provide the four walls. Read about the Four Walls here. Building the Walls.

How large should the down payment be? The goal should be at least 20%. Putting 20% down will eliminate the cost of PMI (private mortgage insurance). PMI will add a couple of hundred dollars to your monthly payment this is about 1% of the amount borrowed per year. This insurance does not protect you it protects the bank but you pay.

Stay away from zero down and certainly don’t do anything less than 10%!

There will be other costs to purchase that you will need to pay. Closing costs, inspection fees, perhaps legal fees. All these will need to figure into your costs to purchase. It may be possible to get the sellers to pay some, but that will not happen in a seller’s market.

Get your financial house in order

Eliminate all other debt. Payoff those credit cards, student loans, car payments and personal loans. When you pay these off you will free up money to use for other things.

Be absolutely certain to have an emergency fund. I cannot stress how important this will be. When you rented the landlord fixed anything that broke. Well now you are the landlord and you will have to fix anything that may break. Trust me on this something will break. Emergency Fund: 6 Reason Why Having One is Important

Create a fund to fix up your new dream home. That old furniture may not look so good and needs to be replaced. There will be other fix up things blinds, shades or curtains for those windows, landscaping and maybe painting. These things can add up quickly so have a budget and put the cash aside. If you don’t you will run up those credit cards and create new debt taking important dollars away from your much needed items to live.

Home Buying – How much can you Afford?

The Foundation is in place now what?

All debt has been eliminated an emergency fund is in place, a fund to fix up is in hand and the all-important down payment is in place. What is your next step?

How much can you afford? What should be your monthly payments? The goals is to not spend more than 25% of your take home pay on your mortgage payment. In addition you don’t want to have a mortgage for more than 15 years. With a shorter period to pay down your mortgage you will actually own your home instead of the bank.

What would it be like to not have a mortgage or rent payment? Now you will truly be able to build wealth. Yes you will need homeowners insurance and to pay property tax but these two expenses will be small compared to your income.

What is included in the mortgage payment?

Included in the mortgage payment are a number of costs. The actual amount you borrow to purchase is part of the payment this will be the repayment of principle and the payment of interest (P&I). Then you will need homeowners insurance. Property tax and any HOA (Home Owners Association) fees will be included.

When shopping for a new home you need to take these costs into consideration. The higher they are the less that will be available for the principle and interest and the less house you will be able to afford.

Home Buying – How much can you Afford?

Example:

If we assume that your take home pay is $5,000 per month 25% would be about $1,250 per month for your mortgage payment. Now if property tax is $200 per month, homeowners insurance is $100 per month. If there is a HOA fee you would reduce that amount as well. For our example we will only take property tax and insurance into consideration. $1,250 less $200 less $100 will leave $950 for principle and interest.

Interest rates are low right now around 3% so let’s use that for our example. Our mortgage payment cannot exceed $950 for principle and interest. The means you can borrow about $137,000. Add in a 20% down payment of $34,250. That means you can afford a home valued at $171,250.

To buy a home with a higher value you will need a larger down payment or increase your income to be able to afford a larger mortgage payment.

 

Other Factors to consider

In many markets the ability to buy a home is very competitive. Get yourself preapproved for a mortgage. Know what you can afford. Stay away from any variable rate mortgage. Rates are only likely to increase from where they are now.

Get a knowledgeable real estate broker. They will be helpful in guiding you. A good broker will know the markets and what it will take to be successful once you have found your dream home.

Make this a happy process and enjoy it!

One last thought you forever house does not exist. We bought ours three houses ago. The average time spent in one home is 7 years.

Good luck! And thank you for reading.

Home Buying – How much can you Afford?

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