Buying a new home is a life-changing experience, but no one should go broke signing the papers. However, it’s easy to get carried away when checking out available listings. Since a house is possibly the largest investment you’ll ever make, it’s important to know your budget before touring any properties. Follow these simple steps to ensure you can easily afford your next home.
1. Figure Out a Realistic Price Range
Shopping for a new home can feel like a kid in a candy store. There are so many amenities that catch your eye, but can you even afford it all? Before scheduling an appointment to view Lake Murray Real Estate, make sure to figure out how much you can actually spend. To do this, you need to figure out your debt-to-income (DTI) ratio.
Most people aren’t living debt-free. Credit card debt, student loans, child support, and auto loans are among the most common types of debt. However, too many people overlook these accounts when house hunting. Before meeting with a real estate agent, it’s time to determine your DTI. Simply divide your monthly expenses by your monthly income. Multiply that figure by 100 to get your DTI percentage. For example, if you bring home $6,000 each month and have $2,400 in expenses, your DTI would be 40-percent.
The higher your DTI, the riskier you seem to lenders. Mortgage companies are less likely to offer a loan to someone with a lot of debt. Typically, lenders look for borrowers with a DTI that’s 50-percent or lower. If you discover your DTI is above the “safe” range, it’s time to start paying down your debts.
Once a buyer calculates their DTI, they can reasonably determine how much home they can afford. Mortgage payments should never exceed 33-percent of your monthly income. That’s why DTI is so important. The lower your DTI percentage, the more debt you can take on when you buy a house.
2. Determine Mortgage Payments
No one ever takes out a car loan without asking about their monthly payment, and the same should be true when getting a mortgage. It’s crucial to determine your monthly payments before signing on the dotted line. There are two major players in figuring out your payments: term length and interest rate.
Term length is the number of months or years before a loan is repaid in full. Most conventional mortgages have 15- or 30-year terms. However, depending on your financial status, you may qualify for a shorter or longer term. The longest mortgage term available in the United States is 50 years, but it’s very rare.
Why would anyone want to pay on their home loan for decades? Simply put, the longer the term, the lower the payments. Many buyers select higher terms so that they can afford a more expensive house. However, you’ll also continue to pay interest for the entire duration of your mortgage.
Interest rates greatly affect mortgage payments. A number of factors may come into play when determining your interest rate, including credit score, real estate climate, and current market trends. The lower the interest rate, the less you’ll pay for your home in the long run. For example, if a person buys a home for $350,000 and has an interest rate of 3.5-percent on a 30-year loan, they’ll end up really paying $565,796.31 for their property. It’s wise to do the math before buying that dream home.
3. Consider the True Cost of Homeownership
Buying a home costs a lot more than just the monthly mortgage payment. As a homeowner, you’ll encounter a variety of additional costs. It’s best to take these into consideration before making an offer.
In addition to a mortgage payment and interest, homeowners also have to pay property taxes. These taxes help fund local schools, roads, police, and fire departments. Since property taxes vary depending on the neighborhood and city, be sure to investigate the current rate before house hunting.
Homeowners insurance is another costly expense to consider. This coverage protects homeowners in the event of theft, fire, and other acts of nature. While it may seem tempting to forego buying a policy, most lenders won’t give you a mortgage without proof-of-coverage.
Down payments prove to lenders that a person is serious about purchasing a property. However, many people can’t afford the standard 20-percent down payment. In this case, the buyer may have to pay private mortgage insurance (PMI). This insurance protects the lender in case the buyer defaults on the loan. Once the homeowner reaches 20-percent equity in their home, they can choose to cancel their PMI.
Closing costs are another big expense to consider. This fee covers any home appraisals, title writing, and legal costs. The average buyer should expect to pay at least 3-percent of the purchase price in closing costs; however, this number varies depending on the loan and location.
The fees don’t stop once you get the keys. Other variable expenses include utilities, water, and repairs. It’s smart to plan for unexpected costs in your budget and have some emergency funds available.
4. Rethink Your Budget
After doing all the math and figuring out the true price of buying a new home, it’s time to be brutally honest. Can you really afford your dream home? If you’re unsure, there may be some wiggle room in the budget. Ask a mortgage broker to run the numbers with a longer term, or see if another lender will offer a better interest rate. Both options may shave a few hundred dollars off your monthly payment.
Of course, you can always have your real estate agent look for less expensive properties. Many people buy a starter home and upgrade to something more expensive later down the road. There are always plenty of housing options out there, so don’t hesitate to ask for advice.
Never Miss a Mortgage Payment
It’s easy to avoid defaulting on a mortgage if you know how much you can afford in the first place. Figuring out your DTI, shopping around for the best mortgage, figuring in other expenses, and looking for ways to lower your payments will ensure you purchase a house that’s within your budget. Once you have all these vital numbers in order, you’ll be able to shop for a new home that’s within your price range.