Finding the right home to support your lifestyle and current needs are important, but just as important is knowing and understanding your finances. Not only will it help determine what you can qualify for and assist you with your purchasing options, but it can also determine your lifestyle going forward, as you start balancing your new mortgage with other expenditures.
So how can you calculate your mortgage affordability as you’re venturing into your home purchase? It’s simple!
STEP ONE: Figure out your income. Once you have identified your total gross income, it’s easy to determine a financial guideline for what you can afford. The simplest method is to multiply your total gross l income by 2.5. For example, if you bring home $50,000 every year, you can look for homes in the price range of $150,000, depending on your other financial commitments, current interest rates, and your credit history. Bear in mind that if you’re looking for a condo, you’ll also have to factor in a monthly fee for maintenance and upkeep as dictated by their association.
STEP TWO: Consider what you’ve saved for your house-buying plan. It’s advised to have enough cash to make a down payment of at least 3%, though most home buyers put down between 5 and 10%. Ideally, a 20% down payment would eliminate any requirement for private mortgage insurance and increase your options to qualify for a loan. Consider that you’ll also have to pay closing costs and various fees, including appraisals, credit reports, tax services, government recording charges and your lender’s origination fee, all of which add up to 2 to 5% of your total purchase price.
STEP THREE: Determine what you spend every month. What do you spend after you pay rent or mortgage? Determine your monthly utility costs, food and closing costs, and telephone and internet charges. Additionally, add in any future expenses that may come up – say, for example, home renovations, maintenance and care, family vacations and the like.
STEP FOUR: Consider your financial reserves. Though your lender will work with you to help you understand and determine all the costs that are associated with your mortgage, it’s a good idea – and smart, healthy financial thinking – to plan ahead for life’s little unexpected experiences and emergencies. You want to make sure you have financial reserves in case of illness or job loss and that you have more than enough reserves for events like weddings and college tuition. Having intimate knowledge of your finances and how they work can help you buy smart, and stay solid as you start your journey as a homeowner… and that will help you feel safe, secure and happy in your new home for years to come.