December 23rd, 2016 5:08 AM by Jackie A. Graves, President
In my last post, we
looked at the maximum amount of money a home buyer should spend to acquire a
new house or apartment. But there's more to the home buying equation than that
one figure. (For the first article, see: Calculating How Much
You Should Spend to Buy a Home)
take a look at many of the other costs that come with buying a home.
People who purchase homes usually put 20% down. So if you are
looking at a $400,000 purchase, you need at least $80,000 for the down payment.
If you only have $50,000, you should probably buy a house that costs no more
than $250,000. Some people borrow money from friends and family in order to
come up with a higher down payment, but this tactic can backfire. Here’s why.
this maneuver often gets people into a house they can’t afford. Since they have
an artificially higher down payment, it allows them to take on a bigger mortgage. Besides the higher monthly payments,
people who go this route still have to come up with the money to pay back their
friends and family. The bottom line? Take your down payment and work backward
to determine how large a mortgage might be conceivable for you. Then, do the
numbers to make sure you can afford those payments.
While we’re on the topic of mortgages, remember that banks charge
you fees and points to arrange loans. The good news is the bank has to give you
a good faith estimate of what those costs might be before the loan is set up.
It’s smart to get this one-page document before you even identify the house you
want to buy—just to get an idea of what you are looking at. Go over this
document carefully and ask lots of questions. You might determine that it makes
sense to shop elsewhere for a loan if your bank is particularly
expensive. (For more, see: First-Time Home Buyers
Your down payment will tell you how large a mortgage you might
qualify for. Once you have that number, it’s time to figure out how much your
monthly payments will be. You can shop the internet to get a sense of the
current rate and then plug that number into a mortgage calculator to estimate
what your monthly payments might be.
mind that if you build your estimate using an adjustable loan, your payments will be lower
at first. But don’t fall into the trap of buying the largest home you can
afford based on an adjustable rate. If rates rise, your monthly payments
will go up and you may find yourself in a house you can’t afford. To make
matters worse, if rates do rise and housing prices drop, you may not be able to
sell the home either. This is exactly what happened in 2007 to 2010 and caused many people to lose their
suggestion is to use the 30-year rate as an approximation when you are
estimating your monthly mortgage payment. Having said that, remember that under
current tax law, you may receive a tax deduction for the interest you pay on
your mortgage. That means that your mortgage payment may not be as painful as
you might otherwise think. For example, if you are in the 40% marginal tax
bracket and you pay $30,000 in annual interest on your mortgage, you will save
roughly $12,000 in taxes each year. This is one of the most important financial
incentives available to home owners and one you should certainly consider. (For
related reading, see: 5 Tips for Recession
When you move into a new home, you may want to do landscaping,
remodeling or purchase new furniture. Carefully consider the costs of these
expenses and make an objective measurement of what they will cost and when you
plan on spending this money. Owning a home can be expensive. You’ll have to
deal with property tax, insurance and maintenance. As a good rule of thumb, I
suggest you budget two months extra mortgage payments for annual upkeep. This
is for unforeseen fixes and it’s on top of utilities, gardening, etc.
you have your numbers, it’s time to put this all together to see if you can
really afford your home or not.
Open up a
spreadsheet and input the following numbers:
run through this exercise and come up with a negative number, you can’t afford
to buy the home in question. If you end up with a surplus, you might have a
the right home takes time and patience. Make sure you know what you are looking
for before you begin your search. Once you identify where you want to live and
know how large the house you need must be, it’s time to analyze some numbers.
Make sure the price of the home is no more than four times your gross family
income. And make sure that your debt-to-income
ratio will be less
than 40 after the purchase is complete. These broad steps will tell you if you
are on the right path or not.
take your down payment and reverse engineer to determine the maximum amount the
bank might be willing to lend you and what your payments might be. When you
have that number, add up your other housing costs, your other living costs
(including savings) and subtract that from your net income. If the result is a
surplus, the house might be a candidate. But if the result is negative, it’s
time to reconsider your parameters and find a lower-cost housing alternative.
(For related reading, see: Top 8 House Hunting
By Frankle, Neal - To view the original article click here