Many new homeowners make the mistake of borrowing too much money. Before deciding on the price range of the home you plan to buy, decide how large a monthly mortgage payment you can handle. Try to make as large a down payment as possible.
Determine your mortgage payment
The mortgage payment will be composed of the mortgage payment, the property taxes (in most cases), and the mortgage insurance.
Many new homeowners make the mistake of borrowing too much money. Before deciding on the price range of the home you plan to buy, think about how much you want to pay out each month in mortgage payments. Try to make as large a down payment as possible.
The lender will set a maximum on how much you can borrow. However, this maximum is often too much for the average homeowner to pay out comfortably each month. Therefore, use the maximum only as a starting point to deciding how much you will borrow.
When deciding how much to borrow, be sure to take into account saving for your retirement, meeting your financial goals, and maintaining your current lifestyle. If your monthly payments do not allow you to meet these needs, buying the home does not make financial sense.
Home buyers often end up unable to save enough money, to travel, to pursue their interests, or even to eat out and the purchase turns into a burden. Worse, many people buy a home that is too expensive and end up overwhelmed by debt, since home ownership requires more spending than renting: the home must be furnished and repairs and improvements have to be made.
Caution: To avoid having your dream home turn your life into a nightmare, calculate how much you realistically can spend on the monthly mortgage payment. Do not forget to add in the real estate taxes and mortgage insurance.
Lenders will be happy to pre-qualify you by giving you a preliminary limit on the amount they would be willing to lend you. This pre-qualification is not a commitment on the lender’s part; lenders will not commit to a mortgage until they have the property appraisal and all of your documentation. But the maximum they are willing to offer can be helpful for planning purposes.
The maximum debt is based on your income and debt level. It depends on current interest rates, the term of the mortgage, and the property taxes. To get a rough idea, the maximum debt amount is usually about three times your annual gross income.
Estimate your preferred price
Having decided how much of a monthly mortgage payment you can realistically afford, you are now ready to set a price range for your new home. You will give this range to the real estate agent during your first visit or use it to rule out homes you do not want to look at. Don’t be afraid to look at homes that are 15% to 20% over your price range. In many cases, you will be able to negotiate the price down.
Maximize your down payment
You will probably want to make as large a down payment as possible. There are two reasons for this: (1) lenders will generally not require you to pay for private mortgage insurance if you can come up with a 20% down payment and (2) the sooner you pay off your mortgage, the better off you will be financially.
To save the 20% down payment, you may need to go on an "austerity plan" for a year or two. Many home buyers also use cash gifts or loans from family members to meet the 20% figure. If you cannot save 20% of the purchase price, you will still be able to get financing. However, it is best to try to save the 20% to avoid paying for private mortgage insurance.
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