You’ve done your research and have decided you are ready to purchase. So, now what?
Working within a budget will ensure you set reasonable expectations for what you can afford. For tips for how to start, check out our post from earlier this year, Start the New Year Off Better, and remember, your Online Banking system has built in personal financial management tools to help you figure out how you spend your money and create a budget to help you reach your goals – at no charge to you. So, if you don’t already have a budget, get started today. You will need to know what your income is, as well as what your monthly and yearly expenses are before you can decide how much of a mortgage you can afford. And, remember, you will need to stick to your budget if you want to be able to afford homeownership, so be reasonable (If you can’t survive on ramen noodles, don’t budget like you can). On the flip side, be prepared to make some sacrifices to get what you want in the long run.
Even before you are ready to buy, start looking around. Decide where you want to buy and what your non-negotiables are (your “must have” list). This will give you a better idea of what to buy when you are ready, as well as provide an estimate on what it is going to cost you. Prices will increase and decrease with the market, but you will still have a better idea of what to plan for. Next, look into the other costs that come with homeownership: property taxes, homeowner’s insurance, utility expenses, and home repair. If you aren’t paying utilities right now, do some research to see what to expect; if you are, consider how a change in space may increase the cost. Finally, consider the cost of improvements and repairs. Generally, saving 1% of the purchase price each year should cover potential repairs; however, if you buy a real fixer-upper, you may need to plan for more.
Once you know how much you can afford to spend each month and what you want to purchase, it’s time to think about the down payment. 20% has been the standard for years, but the average U.S. buyer is putting down just 12% (1). There are pros and cons to this. Putting down less may leave more cash reserves (remember: you should have 3-6 months of emergency funding at all times), but putting down more may mean lower monthly payments. Take a look at what you have saved and calculate how much of a mortgage you can afford. There are lots of mortgage calculators out there to help.
The amount of loan you get is determined by the size of monthly payments you can make; and the interest rate is determined by your credit-worthiness (more information on how your credit score affects your mortgage rate). You can use tools like the Consumer Financial Protection Bureau to estimate the interest rate you may be able to get based on location, your credit score, and loan type, but there are many loan types out there, so it also helps to learn what’s available to you. The 30-year fixed-rate mortgage is a common option, but there are also three-, five- or seven-year adjustable rate mortgages that may offer lower rates (just keep in mind that, with the current record-low interest rates, you may miss out on the chance to lock in a low rate). This is where a Residential Lending expert can lend a hand (pun intended); they can walk you through the options and find the best match for you and your situation.
The long and the short of it is, homeownership is a big step – full of rewards and pride – but it shouldn’t be something you go into blindly. Do your research. Decide what you want and what you can afford. And find someone knowledgeable to help you through the process.
Best of luck…and congratulations!
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