HOW DO WE DETERMINE HOW MUCH WE CAN AFFORD TO PAY FOR A HOME?

Determining your affordability is one of the first steps to accomplish before entering the housing market. It is important to determine all the costs and expenses you will be liable to pay, the amount of down payment you have, and devise a plan to manage your monthly payments.

One can examine one’s monthly or yearly affordability based on the current expenditures, future forecasts and your overall comfort level and financial health. It all depends on how much money your income allows you to take out for your monthly home ownership payments. An affordability calculator can help you examine all your expenses, including taxes, insurance, monthly payments and more.

The first and foremost step in your homeownership journey is to find a credible financial lender or institution offering affordable interest and mortgage rates. It is highly advisable to examine the packages offered by different lenders before choosing the one that’s right for you.

A qualified lender can help you understand your affordability and spending power. The ultimate decision lies with the homebuyer, either you can extend your bills to the full capacity of the mortgage approved by your lender, or you can hold back and keep your monthly payments affordable. However, the approval of a lender is a necessity in order to invest in your dream home. A mortgage calculator can help you examine your monthly and yearly bills in more detail.

Based on current expenditures and ones comfort level, people can get a good feel for how much money they want to put out per month for a home, but the real answer to this question lies with a qualified lender. The very first step in beginning a home search is to meet with a lender and get their take on what you can afford to spend. Then, it can still be up to any homebuyer if they want to go to the full limit of what a lender will approve, or hold back for their own comfort level. But, that approval from a lender is a necessity in searching for a home.

In this article, we will take a look at the total cost of homeownership and all the vital and additional expenses associated with buying a house.

Here’s everything you need to know:

Down Payment

Typically, buyers are strongly advised to make a down payment worth at least 20-30% of the total ownership cost. It allows them to reduce their mortgage burden and increase their overall affordability in the long-run.

However, if you cannot afford a sizable down payment, do not despair because many loans and lenders allow you to obtain a mortgage without a substantial down payment. However, keep in mind that a higher down payment allows you to maintain a healthier debt-to-income ratio.

Closing Costs

A down payment is not the only costs you have to cover. Be sure to keep substantial savings to cover your closing costs. At closing, there are many parties and costs that you need to clear, and these are all associated with the final purchase and transfer of the property. These typically include attorney fees, title insurance, appraisal fees, home inspection fee, survey, loan origination and more.

Buyers are typically required to pay 2-5% of the total homeownership costs in closing costs. In certain cases, buyers can negotiated with the seller to pay these expenses.

Mortgage Payment

Your mortgage is the most sizable and longer payment that you need to make, and keeping a mortgage calculator is essential to manage your monthly and yearly expenses. It is important to understand all the factors that make up your mortgage payment.

The principal is the amount of money you loaned to buy your home, while the interest is the fee charged by the lender in exchange for the loan you obtained. Now, interest rates are subjected to fluctuation, and they can vary from time to time. Be sure to check out the prevalent interest rate when you apply for your mortgage.

Private mortgage insurance is a necessary evil required by your bank or financial lender if your down payment is less than 20% of the total homeownership cost. In the instance you are unable to make your mortgage payments or end up defaulting on the loan, the private mortgage insurance will cover the loss for the lender. A PMI is a part of your monthly mortgage payment and it typically covers less than 1% of the yearly loan payment.

Property Taxes & Insurance

Property taxes make a significant amount of our monthly and yearly payments, and they are subjected to constant change and increments. These taxes are levied by the local government in order to raise revenues for government-funded programs and administration. These taxes are used to fund public parks, libraries, schools and more.

Typically, lenders instruct buyers to submit the property taxes into escrow accounts. Instead of making the entire tax amount once a year, it breaks them down into monthly payments that are added to your mortgage expenses. Then, the lender pays your property taxes for you when they are due.

The rate of the property taxes and increments depend on your state, county and location, and they are typically calculated as a percentage of the total value of your property. Some states levy lesser property taxes and tax waivers to encourage homeownership while certain states and counties increase tax rates to raise revenue.

Homeowners’ insurance is another prominent part of your monthly mortgage payments, which is also submitted to an escrow account. Once you obtain your homeowner’s insurance policy, the lender can make these payments for you. However, the policies of various lenders tend to be different in this regard, so be sure to find a lender who offers flexibility of payments.

It is important to understand that homeowner’s insurance tends to be different form private mortgage insurance. It is taken out to provide financial coverage against weather hazards, fire hazards, theft, vandalism and more. Some policies also tend to include natural calamities, earthquakes and floods.

Home Maintenance & Upkeep

Once you have bought the house and moved in with your family, your monthly costs and expenses will rise further. You will have to pay the costs of the upkeep and maintenance of your property. You might need to perform certain repairs around the premises. The utility bills and moving costs are also a significant part of the total cost of homeownership.

Keeping an affordability calculator is important to stay one step ahead and be prepared for all your expenses and costs. Remember, and overstated budget is always better than an understated one because financial surprises can undermine your financial health in the home buying process. So, be sure to account for each and every cost that you will incur.

Outline:

• A mortgage and affordability calculator can help you prepare an accurate budget and understand your own affordability.
• It is important to focus on making a sizeable down payment, or taking out a mortgage loan that lies within your comfort zone of affordability.
• Stay prepared and focused on managing your monthly and yearly payments, and forecast all your existing and future costs to avoid surprises.