Can you
afford to buy a home?
If you feel you’re ready to buy a
home, you need to consider if you can afford to buy one.
You don’t want to overextend yourself to the point that
you can’t keep up with your mortgage payments and risk losing
your home. Use
worksheet 1 to help you evaluate your current expenses.
Evaluating
your current expenses
Most first time
home buyers find that after the monthly mortgage payment, moving
costs, immediate repairs, property tax, and insurance, they find
that the amount is higher than their previous rent.
If you have money left over at the end of each month after
paying your bills, you’re probably able to buy a house.
If not, budgeting your money could allow you to cover the
cost of homeownership.
Most
expenses are fixed such as car payments, taxes, insurance.
Others are flexible, meaning you decide how much money will
be spent on them, such as entertainment and clothes.
Determining
how essential it is to own a home is very important.
Would you be willing to postpone some purchases, and spend
less in other areas?
A
good measuring stick to see if your ready to buy a home is to put
aside the amount of money you would be willing to pay a month over
the cost of your current housing cost. If you can do this,
you’re probably ready to buy a home.
Just remember that if you
can’t cover the mortgage and other housing cost each month, you
could lose your home.
The
costs of buying a home
There are two types of main costs
involved in buying a home.
Upfront
costs
Upfront costs consist of the down payment,
a variety of closing (or ”settlement”) costs, and the costs of
moving and settling into your new home.
Down
payment. Most
first time homebuyers depend on a mortgage from a financial
institution to buy a home. Nearly all mortgage programs require
that you give some part of your own funds (the down payment)
included in the deal. If
you have some of your own money involved, Mortgage lenders are more secure that
you won’t walk away from it if your finances go down.
Customarily, the lenders would expect
the buyers to make a down payment of at least 20 percent of the
buying price of the house. At
present, buyers can pay as little as 0 to 5% down provided they
purchase private mortgage insurance (PMI), which helps protect the
lender in case the borrower fails to pay off the loan.
Below are some links to websites that offer
mortgage loan programs requiring little or no down payment.
Closing
costs. Homebuyers
must be ready to pay several additional upfront costs incurred in
purchasing a house, along with the down payment.
Called “closing costs”, these expenses generally range
from 3-6% of the mortgage amount.
If you were to buy a $175,000 house with a 5% down payment
($8,750), you could expect to pay between $4,987 to $9,975 for your
$166,250 mortgage.
Closing costs for various will vary from
mortgage loan program to mortgage loan program. Learn more
about the various closing cost of each type of mortgage loan
below.
Settling-in
costs. There will
also be cost involved in moving and settling into your new home. The house may need major repairs, or you might want to
purchase new appliances. Just remember these costs so you don’t
spend all your funds on the buying a home.
Ongoing
costs of buying a home.
A
renter’s only ongoing cost is a monthly rent payment.
For homeowners, ongoing cost consist of a monthly mortgage
payment, property taxes, homeowner’s insurance, mortgage
insurance (if
required by the mortgage lender), and utilities and maintenance.
Monthly
mortgage payment. Every
mortgage payment contains both the repayment of a portion of the
principal and the interest. Mortgage
lenders refer to payments of principal and interest as
“P&I.”
Your total monthly payment relies on the
amount you borrow, the interest rate, the repayment period (or
“term”), and whether you have a fixed-rate or an
adjustable-rate mortgage.
For example:
|
Size
of Mortgage
|
Interest
Rate
|
Term
|
Monthly
Payment (P&I Only)
|
|
$160,000
|
6.5%
|
30
yrs.
|
$1,011
|
|
$160,000
|
6.5%
|
15
yrs.
|
$1,350
|
Taxes
and insurance. In
most cases, a homebuyer’s monthly mortgage payment contains the
amount required to repay a part of the principal and accrued
interest (P&I), and an extra amount for property taxes,
homeowner’s insurance and private mortgage insurance.
The mortgage lender holds these additional amounts in an
individual “escrow” account and then pays the tax and
insurance bills when they come due.
The mortgage lender ensures that these
annual expenses will be paid on time.
If taxes and insurance are not escrowed each month, the
homeowner should be prepared to pay off these bills when they come
due.
Other
costs of homeownership. Other
ongoing costs of owning a home consist of utilities (gas, water
and electricity) and maintenance costs.
First-time homebuyers aren’t prepared for how expensive
basic upkeep is. The
cost of utilities may differ greatly (increasing during the
summer, dropping in winter), Unexpected repairs also add to the
cost making it necessary that homeowners always have available
cash on hand.
This has only been a general overview of
the expenses involved in buying a home, and if you have the budget
to go ahead and begin the home buying process. The next section
goes into more detail about the expenses involved in buying a
home.
> Next > How Expensive a
Home Can You Buy
|
