When Should I Buy a House?
Sometimes, it’s a matter of when and not if you should buy a home. Maybe you’re a recent grad or newlywed, and the idea of homeownership seems like the next obvious step. But how do you know when you’re truly ready to put down a hefty chunk of change on a home purchase? Homeownership is the most significant financial decision of your life. Consider the following and whether you are prepared for each step. Then, you may be on your way to homeownership.
How much money is enough for a down payment?
For first-time homebuyers, putting a down payment on your first significant investment is a big deal. Maybe your parents gifted you money toward the down payment of your first home. Or perhaps you’ve experienced some windfall that put you in the position to put down a down payment. But if you’re like most people, you’ll have to save your hard-earned money on a down payment for a home. The rule of thumb is to put down 20 percent of the home price. This percentage is standard if you want to avoid paying private mortgage insurance ( PMI ). Typically, you can expect PMI to annually cost between 0.5 and 1 percent of the entire mortgage loan amount.
If you don’t have 20 percent saved up, that doesn’t mean your home-buying dreams are impossible. You can purchase a Federal Housing Administration ( FHA ) loan for as little as 3.5 percent down. But a larger down payment does equate to smaller mortgage payments. Let’s say you purchase a home with a $300,000 mortgage and a four percent fixed-rate mortgage interest rate for a 30-year term. You’d then pay $1,432.25 a month for 30 years. If your mortgage were $280,000, then you’d pay $1,336.76 a month for 30 years. Also, be aware that some mortgage lenders won’t approve you for a mortgage unless you put at least 5 to 10 percent down.
Overall, it’s best to know if you can afford your home over the long haul. And it’s never worth it to sacrifice your emergency fund for the down payment on your home. If anything unexpected comes up, you could be in a pinch, needing to pay extra costs without those funds.
Can I afford monthly mortgage payments?
You might have the financial means to purchase a home for cash, which is rare these days. But if you’re like most people, you will have to take out a home loan. Before applying for a home loan through a mortgage lender, it’s always necessary to consider your debt-to-income ratio (DTI).
The FHA uses the debt-to-income ratio standard. Think of it as a general guideline for mortgage approvals. They use this ratio to determine if a borrower will make their mortgage payment each month. DTI considers your housing expenses like mortgage payments, mortgage insurance, home insurance, and property taxes. Having a DTI at 43 percent is generally acceptable, but economic conditions may make lenders more or less flexible about this number.
Let’s say your gross monthly income (the amount before taxes and other deductions) is $3,000. Multiply this amount by 0.43, and you get $1,290. That $1,290 is the maximum amount you should be spending on debt payments. But, like many others, you may also have student loans, a car payment, and credit cards. Let’s say these debt payments total around $440 a month combined. That means you could theoretically afford $850 in additional debt on a monthly mortgage payment. So, if you’re going back and forth on deciding whether you should buy a house, try to pay down your debt as much as you can.
How much are property taxes?
When you own a home, you can expect to pay property taxes. Your local government will base your tax on the local tax rate and the assessed value of your property. To calculate the amount you’ll pay in taxes, you should take the assessed value and multiply it by the property tax rate. Let’s say you own a home with an assessed value of $200,000, and your county tax rate is one percent. Your annual property tax will be $2,000 per year. But some mortgage lenders will bake property taxes into your mortgage payment. And if that’s the case, you may be paying taxes monthly.
Factor in closing costs
Expect to pay between two and five percent of the purchase price of your new home in closing costs. Let’s say your new home costs $200,000; you could pay between $4,000 and $10,000 in closing costs. Have that money ready to go for the final closing of your home. Pretty soon, you’ll officially be a homeowner!