Latest posts by Kumiko Ehrmantraut (see all)
- Budgeting Tips for Single Parents: 7 Ways to Succeed With Your Money - January 20, 2022
Buying a home is a rite of passage for every growing family. Taking the leap into homeownership is a daunting task, but knowing what to look for can help protect you in the long-run. After all, purchasing a home is the largest purchase most people will ever make. Here are a few considerations to keep in mind so that you can close the deal with confidence!
Determine How Much House You Can Afford
Most of us have a wish list for our dream home. From swimming pools to extensive in-home libraries, we fantasize about the features and amenities we want our homes to have.
However, unless you’re extremely lucky, chances are that your first home won’t have everything on your wishlist. And that’s okay!
It can be tempting to get caught up looking for that perfect home, but it’s also important to focus on how much house you can afford. The general rule of thumb is that you can afford a mortgage that is 2x or 2.5x your gross income. For example, if your household income is $100,000 per year, then your mortgage should be in the realm of $200,000 to $250,000. Of course, this calculation is just a general guideline.
Another way to determine what you can afford is to look at your monthly income. Conservative financial advisors say you shouldn’t spend more than 25% of your monthly income on your mortgage payment. Other advisors say that this number can be as high as 28%. For families taking home $5,000 a month, this means that your mortgage payment should be in the ballpark of $1,250 and $1,400 a month.
Consider Your Lifestyle and Future Self
When purchasing your first home, you’ll want to remember to consider more than just the floor plan and the amenities. Ask yourself whether the home, its location, and the neighborhood fit the lifestyle for you and your family. Here are some questions to consider:
- What schools are in our zoning district?
- Can we deal with the daily commute to work?
- Are we okay with our proximity to family and friends?
- Will this home still be a good fit for us 5 or 10 years from now?
- Can we afford to furnish this home without feeling “house poor?”
- Are we planning on having kids (or more kids) in the future?
- Is there enough parking for when we have guests over?
- Has the property been maintained? Or will it require upgrades and renovations?
Only you can determine what matters most to you and your family. Everyone has a different list of “essentials” for their lifestyle that will get factored into their home-buying decision.
It is also important to consider your hobbies and interests. For example, if you are a cyclist, you’ll probably want extra space in the garage to be able to store your bicycle next to your car. If you enjoy gardening and growing your own produce, then you’ll likely prefer a house with a garden and a lawn. Are you an avid trail runner? Then proximity to local trails might be something worth considering.
While none of us has a crystal ball to see into the future, it is still possible to find the perfect house by considering your current lifestyle and factoring in your future goals!
Find a Lender You Can Trust
Part of purchasing a home is finding a mortgage lender that is right for you. Similar to buying a home, you will need to shop around to find the best mortgage lender available. There are more options than ever before, including local banks, credit unions, online lenders, and much more!
Here are a few tips to find the best lender:
- Compare rates from multiple mortgage lenders. Most experts recommend talking to at least three different mortgage lenders to find the best rate. Once you have several quotes, you can compare each loan's terms and determine which one is right for your situation.
Remember, picking the right mortgage member isn’t just about finding the lowest rate. You will also want to evaluate the “hidden” fees such as penalties for late payments or the company’s policies for payment deferrals in the event of unemployment. Another factor to consider is the mortgage company’s ability to communicate with you. If communication is challenging during the pre-approval process, it likely won’t get any better once you take out a loan. - Consider closing costs and private mortgage insurance. The interest rate on your mortgage isn’t the only cost when purchasing a home. The closing costs typically range between 2% and 5% of the total price of your home. This means that you can expect to pay $2,000 to $5,000 per $100,000 of your home’s value in closing costs. Remember, closing costs are in addition to your down payment!
Speaking of which, if your down payment is less than 20% of the value of your home, then you may be required to carry private mortgage insurance (PMI). Homebuyers who put less than 20% down are considered higher risk because things can quickly go underwater. PMI is generally calculated as 0.5% to 1.0% of the entire loan’s balance each year. For example, if your mortgage is $100,000, then your PMI costs could be as high as $1,000. Divided over the course of 12 months, that would be an additional $83.33 per month tacked onto your mortgage payment.
Prepare for Your First Home Purchase Today
Purchasing your first home is as stressful as it is exciting. To help reduce that stress, begin planning today. Make a list of “essentials” that you would like your home to have, but remember that this list might evolve as you begin exploring the market.
Perhaps the two best ways to reduce stress are to (1) fully fund your emergency savings and (2) begin saving for your down payment.
By fully funding your emergency fund, you’ll have the peace of mind that you can afford unexpected expenses. Whether it’s an auto expense, job loss, or home repair, you will be able to pay for the emergency in cash! You are taking on a whole new level of responsibility when you purchase a home, and an emergency fund is an incredible safety net to have.
The second way you can prepare is to save for a down payment on your home. The larger your down payment, the more affordable your mortgage will be. Better yet, if you are able to save enough to put down 20% of the home’s value, then you will save the additional cost of a PMI.
My favorite place to save money is through CIT Bank, which offers up to a 0.40% APY to help you accelerate your savings. There are two ways to qualify for this 0.40% APY. High balance savers maintaining a balance of $25K or more can earn this high rate. And regular savers contributing a minimum of $100 a month to their savings account can earn the rate as well.
CIT Bank is an FDIC insured online banking company, so you can take advantage of this great rate no matter where you live!
Are you in the process of purchasing your first home? Or do you have some insight to share from your home-buying journey? Feel free to share your experience in the comments below!
When we are purchasing our first home and shopping for multiple lenders, do you do that when you’re ready to place and offer and get a loan or do you wait do that during prequalification stage?