Buying your own home can be counted among life’s most gratifying achievements. After all, you’ve been cataloging renovation and décor ideas from countless hours of HGTV programming – it’s finally time to put them to the test. Well, almost.
While it’s easy to get caught up in the excitement of the process’ outcome, it’s important to set realistic expectations for yourself by asking a simple but critically important question: How much house can I really afford?
As someone who is dipping his toes in the water of potential home ownership in the relative near-future, researching for this piece opened my eyes to a few things that I hadn’t previously thought about. So, I hope this helps someone else too.
There are many online wizards to help you, but the answer is often more complicated than punching in a few numbers and letting a calculator do the work for you. If you’re just starting the search for your first home, we’ve included some helpful things to consider below.
1. How much money are you bringing in per month?
This, unsurprisingly, is among the most important components to nailing down a target price range for your new home. Like many parts of this process, there are a few popular models available when it comes to income. In the hopes of keeping things simple, we’ll refer to a popular matrix that asks you to multiply your monthly household income by 25% to reveal your “maximum” mortgage payment.
For example, if a household earns a total of $6,000 a month, that means that a monthly mortgage payment should be no more than $1,500.
Of course, this is a ballpark estimate! You’ll probably find a variety of outcomes on the same figures across the internet, but this 25% calculation certainly gives you an idea of where you’ll want to land when it comes to fitting a new home’s monthly cost into your budget.
2. Your down payment will start you on the journey of home ownership
Historically, it was suggested that homebuyers put at least 20% down when purchasing a home, allowing buyers to avoid paying Private Mortgage Insurance (PMI). However, in keeping with the changing landscape of real estate, it can actually be a smart financial decision to put down less money compared to saving for a higher amount over time. For example, if your goal is to save $50,000 over ten years ($420 a month), home values could continue to rise as they are currently at 6% year over year, meaning that your down payment is increasing faster than you can save it. The alternative to this is putting down a lower amount – say 3% and rather than saving the $420 per month for 10 years, you can pay $111 a month for Private Mortgage Insurance (PMI) and start building equity in your home immediately Your 6% value increase will build wealth faster than saving a fixed monthly amount.
3. But wait… there’s more! Don’t forget to factor in these costs.
I know – I’ve thrown a lot at you already, and we’re only on the third bullet, but stay with me. If you haven’t thought of closing costs yet, we’ll cover them here. On average, closing costs wind up being an additional tab, about 4% of the purchase price of your home. On the bright side, they cover a lot, like:
– Appraisal Fees
– Home inspections
– Credit reports
– Homeowner’s insurance
It’s easy for closing costs to become an afterthought when you’re tallying up the cash needed up-front and calculating your potential mortgage payment options. Don’t make this mistake!
Of course, moving into your new home is going to come with its own set of financial needs. Even with a brand-new home, you could end up spending more than anticipated when it comes to things like paint, window treatments, landscaping, home security, and more. It’s a smart idea to have something of a reserve for these hidden costs.
4. Enjoy (and trust) the process
While the end result can feel like a dream come true, some of the details and time spent agonizing over numbers can be the thing of nightmares. It’s important to plan far in advance of your home buying journey, allowing you to survey the market, save for a down payment, and research (kind of like you’re doing while reading this blog!)
Want more information? Service Credit Union has partnered with EverFi to provide members with crucial financial education opportunities on this and other subjects. You can learn more here with EverFi, and check out Service CU’s “First Time Homebuyer” information here.
If you are ready to begin the process of buying a home, visit servicecu.org/mortgages today for more information!