Can you afford to buy a home?
If you feel you’re ready to buy a home, you need to consider if you can afford to buy one. You don’t want to overextend yourself to the point that you can’t keep up with your mortgage payments and risk losing your home. Use worksheet 1 to help you evaluate your current expenses.
Evaluating your current expenses
Most first time home buyers find that after the monthly mortgage payment, moving costs, immediate repairs, property tax, and insurance, they find that the amount is higher than their previous rent.
If you have money left over at the end of each month after paying your bills, you’re probably able to buy a house. If not, budgeting your money could allow you to cover the cost of homeownership.
Most expenses are fixed such as car payments, taxes, insurance. Others are flexible, meaning you decide how much money will be spent on them, such as entertainment and clothes.
Determining how essential it is to own a home is very important. Would you be willing to postpone some purchases, and spend less in other areas?
A good measuring stick to see if your ready to buy a home is to put aside the amount of money you would be willing to pay a month over the cost of your current housing cost. If you can do this, you’re probably ready to buy a home.
Just remember that if you can’t cover the mortgage and other housing cost each month, you could lose your home.
The costs of buying a home
There are two types of main costs involved in buying a home.
Upfront costs (the down payment and closing costs)
Ongoing costs (monthly mortgage payment, homeownership expenses).
Upfront costs
Upfront costs consist of the down payment, a variety of closing (or ”settlement”) costs, and the costs of moving and settling into your new home.
Down payment. Most first time homebuyers depend on a mortgage from a financial institution to buy a home. Nearly all mortgage programs require that you give some part of your own funds (the down payment) included in the deal. If you have some of your own money involved, Mortgage lenders are more secure that you won’t walk away from it if your finances go down.
Customarily, the lenders would expect the buyers to make a down payment of at least 20 percent of the buying price of the house. At present, buyers can pay as little as 0 to 5% down provided they purchase private mortgage insurance (PMI), which helps protect the lender in case the borrower fails to pay off the loan.
Below are some links to websites that offer mortgage loan programs requiring little or no down payment.
FHA Loans
VA Loans
CalPERS Loans
Other mortgage loan programs
Closing costs. Homebuyers must be ready to pay several additional upfront costs incurred in purchasing a house, along with the down payment. Called “closing costs”, these expenses generally range from 3-6% of the mortgage amount. If you were to buy a $175,000 house with a 5% down payment ($8,750), you could expect to pay between $4,987 to $9,975 for your $166,250 mortgage.
Closing costs for various will vary from mortgage loan program to mortgage loan program. Learn more about the various closing cost of each type of mortgage loan below.
FHA Loan closing costs
VA Loan closing costs
CalPERS Loan closing costs
Settling-in costs. There will also be cost involved in moving and settling into your new home. The house may need major repairs, or you might want to purchase new appliances. Just remember these costs so you don’t spend all your funds on the buying a home.
Ongoing costs of buying a home.
A renter’s only ongoing cost is a monthly rent payment. For homeowners, ongoing cost consist of a monthly mortgage payment, property taxes, homeowner’s insurance, mortgage insurance (if required by the mortgage lender), and utilities and maintenance.
Monthly mortgage payment. Every mortgage payment contains both the repayment of a portion of the principal and the interest. Mortgage lenders refer to payments of principal and interest as “P&I.”
Your total monthly payment relies on the amount you borrow, the interest rate, the repayment period (or “term”), and whether you have a fixed-rate or an adjustable-rate mortgage.
For example:
Size of Mortgage
Interest Rate
Term
Monthly Payment (P&I Only)
$160,000
6.5%
30 yrs.
$1,011
$160,000
6.5%
15 yrs.
$1,350
Taxes and insurance. In most cases, a homebuyer’s monthly mortgage payment contains the amount required to repay a part of the principal and accrued interest (P&I), and an extra amount for property taxes, homeowner’s insurance and private mortgage insurance. The mortgage lender holds these additional amounts in an individual “escrow” account and then pays the tax and insurance bills when they come due.
The mortgage lender ensures that these annual expenses will be paid on time. If taxes and insurance are not escrowed each month, the homeowner should be prepared to pay off these bills when they come due.
Other costs of homeownership. Other ongoing costs of owning a home consist of utilities (gas, water and electricity) and maintenance costs. First-time homebuyers aren’t prepared for how expensive basic upkeep is. The cost of utilities may differ greatly (increasing during the summer, dropping in winter), Unexpected repairs also add to the cost making it necessary that homeowners always have available cash on hand.
This has only been a general overview of the expenses involved in buying a home, and if you have the budget to go ahead and begin the home buying process. The next section goes into more detail about the expenses involved in buying a home.
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