Buying a home for the first time for you and your family can be lots of fun. The joy that comes with years of dreaming of having a place you can finally call yours is unmatched. However, make sure you don’t get too caught up in the excitement before asking yourself, ‘How much home can I afford?’
If you don’t plan well, you might find yourself overwhelmed financially. If you are not able to pay the mortgage every month or can’t find the money to do repairs, then the house can be less of a blessing than it is a burden.
Here is a comprehensive breakdown of how you can buy a home without going above your budget.
How Much Down Payment Do You Need
For you to be considered legible for a mortgage loan, you’re going to have to pay a certain amount of money as a down payment. While some loans will require you to deposit 5%, others may go as high as 30%, but the industry standard is 20%.
So, if you’re buying a house worth $300,000 and are required to pay a 20% down payment, then you’ll have to pay about $60,000 and a monthly mortgage payment depending on how long you intend to service the loan.
Break Down Your Monthly Expenses
Lenders usually calculate your monthly income minus recurring expenses to find out how much money they are going to lend you. This information is also important to you because you will have a clear picture of how much money you can dedicate monthly on a mortgage.
As you break down your monthly expenses, make sure you include expenses such as utility bills, food, insurance covers, or child support responsibilities and student loans if there are any.
Use the 28/36 Rule
This rule stipulates that you should not spend anything more than 28% of your monthly income on housing-related expenses. You should also not spend more than 36% of your income on a new mortgage.
If you observe this rule, then you will have enough cash to pay for your food, bills, vacations, and pension fund.
Know the Different Types of Mortgages and Interest Rates
There are several kinds of home loans and you need to be aware of how they work. The one most suitable for you will depend on your credit score and what makes the most sense as per your financial situation.
For instance, a fixed-rate mortgage will have the same interest rate spanning the entire period you’ll be servicing the loan. An adjustable-rate loan means your interest rate can change with time.
Keep in mind that with a long-term loan, you will pay low monthly installments but the interest rate will be high.
Make a Financially Smart Decision
For most people, buying a house with a mortgage is somewhat of a lifelong milestone. Therefore, fully knowing how much you are able to pay for a mortgage is one of the primary steps in the home buying process.
You really don’t need a doctorate to understand your financial abilities and limitations when it comes to house buying. Hopefully, the tips highlighted above will guide you to make a well-informed decision.