Finding a new home is an exciting time in anyone’s life, no matter how much experience you have with the process. You typically consider the layout, neighborhood and proximity to activities, but the financial considerations of your home purchase are just as important to the process. Without proper thought, you may find your dream home turns your finances into a nightmare.
Down Payment
You already know that lenders require private mortgage insurance (PMI) when your mortgage exceeds 80 percent of the purchase price and you may wish to avoid it. Before you write a check for 20 percent, always make sure you can afford it in addition to the closing costs and miscellaneous expenses of moving. Dipping into too much of your savings is the fastest way to sour your home purchase experience.
For example, if your home costs $200,000 then a 20 percent down payment is $40,000. If you assume five percent for your various closing costs and fees, your total check the day of loan closing is $50,000. Maybe you knew to expect that and saved money for your home purchase accordingly, but that figure can be a shock if not.
Even if your lender told you up front to be ready with $50,000 out of pocket, she most likely could not estimate your moving expenses. Your lender could also not know whether you’d need to purchase new furniture for the home or spend money on paint and home decorators once you closed the loan. If every penny of your savings went to the down payment, all these extra expenses end up on credit, causing potential problems later.
Monthly Payments
Lenders and financial experts throw around varying percentages when discussing what percent of your income should go to your monthly mortgage payment. Generally, you don’t want to consider a home purchase if the monthly mortgage payments exceed 35 percent of your gross monthly income, but that guideline is not applicable to everyone. In your situation, you may find that sticking to 35 percent causes money woes.
To ensure your home purchase doesn’t hinder your quality of life, toss out the guidelines of what mortgage you should be able to afford and focus on the hard numbers. Take a look at your budget and current spending. If you find it difficult to make your current housing payment and save money for the future, consider housing options that won’t raise your monthly payment very much. Houses are available in a variety of price points, so there’s no reason to make drastic cuts to your standard of living just to realize the dream of home ownership.
On the other hand, your level of expenses may allow you to spend upwards of 50 percent of your gross income on your monthly payments without compromising your lifestyle. Although it’s always best to plan for the worst, this opens up new avenues to consider. As long as the bottom line makes sense to your financial situation, your home purchase can be a joyful experience.
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