How Much Mortgage Can You Afford?

There are so many factors that go into finding and securing the financing to buy a home.   While lenders require quite a bit of information for you to get a loan, you still need to be aware of your own financial picture. Even if you’re pre-approved for a certain amount of money to buy a home, you still need to dig into your finances a bit deeper than a lender would. The bottom line is that you can’t rely solely on a lender to tell you how much you can afford for a monthly payment on a home. Even if you’re approved to borrow the maximum amount of money for your finances to buy a home, it doesn’t mean that you actually should use that amount. There are so many other real world things that you need to consider outside of the basic numbers that are plugged into a mortgage formula.   

Run Your Own Numbers


It’s important to sit down and do your own budget when you’re getting ready to buy a home. You have plenty of monthly expenses including student loan debt, car payments, utility bills, and more. Don’t forget that you need to eat too! Think about what your lifestyle is like. How much do you spend on food? Do you go out to the movies often or spend a regular amount of cash on clothing? Even if you plan to make adjustments to these habits when buying a home, you’ll want to think honestly about all of your needs and spending habits before signing on to buy a home. 

Now, you’ll know what your true monthly costs are. Be sure to include things like home insurance, property taxes, monthly utilities, and any other personal monthly expenses in this budget. If you plan to put down a lower amount on the home, you’ll also need to include additional insurance costs like private mortgage insurance (PMI).

The magic number that you should remember when it comes to housing costs is 30%. This is the percentage of your monthly income that you should plan to spend on housing. Realistically, this could make your budget tight so this is often thought of as a maximum percentage. By law, a lender can’t approve a mortgage that would take up more than 35% of your monthly income. Some lenders have even stricter requirements such as not allowing a borrower to have a mortgage that would be more than 28% of monthly income. This is where the debt-to-income ratio comes into play.

As you can see, it’s important to take an earnest look at your finances to avoid larger money issues when you buy a home.  

First-Time Homebuyer Tips: Get the Mortgage You Want

Obtaining a mortgage can be overwhelming, particularly for a first-time homebuyer. Lucky for you, we’re here to help you streamline the process of analyzing various mortgage options and choosing one that matches or exceeds your expectations.

Now, let’s take a look at three tips to help first-time homebuyers secure the ideal mortgage.

1. Assess All of the Mortgage Options at Your Disposal

Both fixed- and adjustable-rate mortgages are available, and homebuyers who understand the pros and cons of these mortgage options may be better equipped than others to make the right mortgage decision.

A fixed-rate mortgage ensures a homebuyer will pay the same amount each month. For example, a 30-year fixed-rate mortgage enables a homebuyer to budget for monthly home payments over the course of three decades. And in many instances, a homebuyer may be able to pay off a fixed-rate mortgage early without penalty.

On the other hand, an adjustable-rate mortgage may start out with a lower monthly payment that escalates over the course of a few years. An adjustable-rate mortgage, for instance, may allow a homebuyer to acquire a home that surpasses his or her initial budget thanks to a lower initial monthly payment. However, after the first few years, the monthly mortgage payment may increase, and a homebuyer will need to plan accordingly.

Assess your mortgage options closely – you’ll be glad you did. By doing so, you can boost your chances of selecting a mortgage that works well based on your current and future financial needs.

2. Evaluate Your Credit Score

Believe it or not, a first-time homebuyer’s credit score may impact his or her ability to get the right mortgage. Fortunately, a first-time homebuyer can analyze his or her credit score without delay.

You can request a free copy of your credit report annually from each of the three credit reporting agencies (Equifax, Experian and TransUnion). Then, with your credit report in hand, you can better understand how potential lenders may view your mortgage application.

Of course, if you receive a copy of your credit report and find glaring errors, be sure to let the credit bureau know immediately. This will enable you to get any mistakes corrected and ensure these problems won’t slow you down as you pursue your dream residence.

3. Consult with Potential Lenders

Although getting a mortgage may seem like an uphill climb at first, consulting with potential lenders may prove to be exceedingly valuable, especially for a first-time homebuyer.

Banks and credit unions employ friendly, knowledgeable staff who are happy to educate you about assorted mortgage options. These lenders can teach you about the ins and outs of various mortgage options at your convenience.

Lastly, if you need extra help in your search for the perfect mortgage, real estate agents may be able to offer assistance. These housing market professionals can provide honest, unbiased recommendations about lenders in your area so you can move one step closer to securing your ideal mortgage.

Ready to get a mortgage for the first time? Use these tips, and you can accelerate the process of obtaining a mortgage that suits you perfectly.

Mortgage: What are Points?

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Some mortgage companies offer loans with points. In a nutshell, paying points means paying down the interest rate. One point is equal to 1 percent of the mortgage amount. On a $200,000 mortgage, one point is $2,000. The percentage the interest rate lowers depends on the mortgage company and the market. For example, one point might be equal to a quarter of a percent interest. A loan with 4 percent interest and two points might go down to 3.5 percent interest.

Pros and Cons of Points

If you do pay points, you could get a tax break. Since tax laws are constantly changing, make sure you can claim points if part of your decision is based on the tax break. Other considerations include:

  • If your mortgage is an adjustable rate (ARM), some mortgage servicers only give you the discounted rate until the mortgage rate adjusts. Some may hold the discount rate over. For example, if you have an ARM that starts at 4 percent and you buy two points for a discount of ½ percent, you may lose that discount when the loan adjusts, especially if it changes to a higher interest rate. However, if the bank carries the discount over, the new rate might increase to 6 percent, but your one-half point discount would mean that your new rate would be 5.5 percent.

  • You need additional cash to buy points. If you plan on putting 20 percent down, but you want to purchase points and do not have more cash, you could be less than 20 percent down. However, compare the scenarios to determine which method is better in the long run. If you put less than 20 percent down, the mortgage servicer may charge you PMI, which would negate any savings.

  • You may save more by putting more down. If you put $40,000 down on a $200,000 mortgage, you are going to pay interest on $160,000. If you put less money down and buy points instead, your interest rate will drop, but you may end up paying more for the loan in the long run. Enter the numbers into a mortgage calculator to determine which way you save more.

Scenario

If your mortgage is $200,000 and you put $40,000 down, thus cutting the amount you finance to $160,000, and do not buy points, the total interest you will pay over the length of the loan will be about $115,000.

Using the same scenario, you instead put $36,000 down and buy two points. This drops your interest rate to 3.5 percent from 4 percent. You will save about $16,700 over the life of the mortgage. And, you would have to stay in your house without refinancing for 49 months to break even on your savings. In this case, your $4,000 ends up saving you a net of $13,500 on interest (savings minus the $4,000 it cost you to save).

Before you agree to points or a larger down payment, discuss the scenarios with your accountant or tax attorney to determine which method is best for your situation. If you have to pay private mortgage insurance (PMI), buying points could end up costing you.

Mortgage Tips For First-Time Buyers

If you’re buying a home for the first time, you have a lot to learn. There are so many decisions that need to be made and new terms to be understood. While you may have been saving up for a downpayment, you’re most likely going to need t finance the majority of the cost of your home. Knowing how to deal with lenders, real estate agents, and other professionals involved in the process of purchasing a home will make your life that much more straightforward. Read on for some mortgage tips that every first-time home buyer should understand.

Know Your Budget

You may find when you apply for a mortgage that you’re able to finance more than you thought you could. Being able to borrow such a significant amount is where many home buyers get caught in a numbers trap. Although the bank may be willing to loan you a certain amount, you might not actually be able to afford it. While the bank looks at many of your financial numbers, the bank doesn’t know your entire budget. How much you spend on groceries each month or the cost of your monthly phone bill are out of the picture when the mortgage company approves you for a loan. Whatever amount of money you borrow to buy your house will result in a monthly payment amount. If you’re only paying $800 per month in rent but your mortgage payment will be $1400, that will result in a significant budget adjustment. Will you be able to come up with the additional $600 each month to pay the mortgage? You need to look at your entire budget seriously to be safe in your mortgage transaction. 

Plan For Out Of Pocket Expenses

You know that you need to save for a downpayment on the home of your dreams. What you may not know is that there are many other out of pocket expenses that you need to foot the bill for when you buy a home. These costs include:

Inspection

Legal fees

Insurance

Pizza for the people who help you move

Repairs to the home

Utility costs

There are so many expenses that you need to come up with when you buy a home. Don’t merely save enough for your down payment and stop. Make sure you have a financial cushion for emergencies, money to help furnish the house, and more. 

Mind Your Credit

When you buy a new home, it may be tempting to buy new furniture, decor, or other items for your property. Hold off on opening any new credit or making large purchases. While a new car will look great in your new driveway, it won’t look so good on your credit score. Be very mindful of your credit score when you are getting ready to buy a home.