When it comes time to buy a home the first thing you need to figure out is how much you can afford to spend. How exactly do you figure that out? Well, the first step is breaking down all the costs of purchasing a house and homeownership that you need to budget for.
Calculating Your Monthly Mortgage Payment
The house you can afford first and foremost depends on how much you can spend each month on your mortgage payments. Furthermore, how much you can afford each month for your mortgage payment depends on several different things including the size of your down payment and the interest rate you’re approved for.
There are long term considerations you should take into account when deciding what you can pay each month. You might be able to afford a larger house with an inflated mortgage payment each month but think about the money you could save by buying less house now and saving for another down payment on an even bigger and better house later.
You might not be able to afford your dream house today but with a good investment now and a bit of extra saving, you could be ready sooner than you think. There are more costs to buying and owning a home than simply monthly mortgage payments. Here is a quick list of what you’ll need to pay during the buying process and once you’re a homeowner:
1. Closing costs
These are expenses over and above the price of the property, due when you close on your home. They include loan origination fees, discount points, appraisal fees, title searches, title insurance, taxes, credit report charges, different inspections and more. Typical closing costs are 2-5% of the purchase price of a home. That means if you’re buying a home for $300,000 you could pay anywhere between $6,000 and $15,000 in closing costs.
Your lender will give you a good faith estimate of what your closing costs should be but it is subject to change. And remember, many of the fees you pay at closing are negotiable so look them all over with your agent so you get the best deal. You can always walk away and find a lender who might offer you lower closing costs.
2. Property taxes
Property taxes vary based on state and area. In California, property taxes generally range from 1.1-1.6% of the assessed home value with an average of 1.25. Some communities also have Mello-Roos taxes or parcel taxes so be ready and aware.
3. Homeowners insurance
This covers your losses in the event that a disaster damages your home. Your lender will require you to have homeowners insurance. The average cost of homeowners insurance in California is $80 a month or about $950 annually. Be smart when choosing an insurance carrier and plan so you don’t overpay and ensure you save money on our homeowner’s insurance.
4. Maintenance, Repairs and General upkeep
You don’t have a landlord anymore who will fix your toilet, repair the roof when it needs it or take care of general upkeep. You should have a rainy day fund available so that you’re prepared for any repairs that pop up and need attention. As a homeowner, you will also have to pay trash and water for the house. If you’ve owned before this isn’t a shocker but for renters, these are new utilities you will be assuming. Setting aside the money for these could mean giving up your daily $3.99 coffee habit – either way you should be aware of the added costs of homeownership.
5. Mortgage Insurance
If you choose an FHA loan or go conventional with a down payment below 20%, you will have to pay some form of monthly insurance on your home loan. For FHA it’s called Monthly Mortgage Insurance or MMI and for conventional loans, it’s called Private Mortgage Insurance or PMI. On a $400,000 home purchase your MMI would be approximately $400 and PMI would be about $200. FHA MMI is a lot more expensive than PMI and can never be removed except if you refinance. PMI can be removed after 24 months of payments and 20% equity in your home but you will carry the extra monthly fee for some time.
Either way, it’s important to budget for mortgage insurance if you’re looking at any kind of low down payment loan option. What you can afford should take all of these points into consideration. Also, you need to look at your finances to figure out what kind of loan and terms you will be able to secure. Mortgage lenders will be looking at your credit score, current debt, monthly income and how long you’ve been at your current job.
The Importance of Your Down Payment
The size of your down payment is another huge determining factor in how much home you can afford. That’s because size of your down payment affects both your interest rate and your monthly mortgage payments. The larger your down payment the less you have to pay back each month and the lower your interest rate will be.
Traditionally lenders like buyers to have a 20% down payment however there are programs that allow you to put down less. If you put down less than 20% with a conventional loan you will need to pay mortgage insurance as we talked about earlier. You can also choose an FHA or VA loan if you qualify. Currently, FHA loans require a 3.5% down payment and VA loans can be secured with 0% down.
Now that you know all the costs and considerations that go into buying and owning a home it’s time to sit down with a First Team agent to figure out how all of this fits into your life.