Mortgage

How Much Home Can You Afford?

With demand dropping in the real estate market, now is the perfect time to get a great deal on a home, especially if you are considering stepping up into a bigger, more luxurious home.

Deciding How Much is Too Much

My advice is, if you are looking for a new home, take some time to calculate just how much you can afford to spend. Chances are you have already searched on the Internet. You may have checked out some of the mortgage calculators and tried to figure out how much you can spend monthly before the “ouch” factor raises its head.

Unfortunately those kind of calculators do not really consider all the critical information necessary to make a decision. And many of the calculators base their recommendations on outdated criteria. For example, the old standard for mortgage planning was that total amount of monthly mortgage payment (including taxes and insurance) be 30 percent of your total gross monthly earnings.

Times Have Changed

When this standard was developed, a mortgage was the primary debt for consumers. Nowadays, mortgages are rarely the only debt consumers carry. Most of us have credit card debt, car payments, personal loans, etc. If you have all this debt and stack on a mortgage payment, you could end up drowning in financial obligations.

So one way to get a more accurate calculation is to modify the original formula factor in your obligations. First, add up all your monthly payments. Then take a look at some of the other monthly expenses associated with the home you are considering – home owner association dues, utilities, etc.

Next, take a look at your monthly gross income. Take that amount and multiply it by 30 percent. Subtract your other monthly debts from this amount, and you have the amount you can afford to pay for a mortgage, plus taxes and insurance.

Do not panic if it suddenly looks like you cannot afford as much as you had hoped. There are a number of mortgage options that make it fairly easy to stay within your budget.

These strategies for calculating your debt give you some basic ideas of what you can afford, and keep you from getting in over your head. The best way to truly understand your buying ability is to call me so we can discuss your options.

Avoiding Risky Home Loans

Nobody wants to get stuck in a situation where you buy a home and then later loose it to foreclosure. If I can offer any advice, it would be to always be careful BEFORE getting a loan by making sure you understand the terms, and seeing that it fits your budget the best it can.

Here are 3 pieces of information I hope you will consider regarding your new or current home loan:

1) You should always aim for a fixed home mortgage rate. As you can see from the current economy, an adjustable rate loan can get you into trouble down the road by fluctuating up higher than you can afford.

2) It’s a good idea to meet with a home loan financial adviser you trust, and make sure they have the experience you need to make the right decision. By taking the time to build a relationship with them, you can more easily stay out of trouble. You want to work with a loan adviser you are comfortable calling at any time for answers and advice.

3) Never ignore any notices you receive from the bank. If you are currently in a bad mortgage, please know there may still be options to help you get into a better mortgage before your house goes into foreclosure.

Saving For a Down Payment

As a country, Americans have not been the best at saving money. A report recently released by the Bureau of Economic Analysis, charts our efforts to save, continually spiraling down, and it indicates the amount we save is minus half a percent. With this in mind, it is easy to see why first-time homebuyers struggle to find a down payment.

Today, the preferred down payment is normally 20%; however, very few people have that much ready money on hand. Although many lenders offer mortgages with less than a 20% down payment, it always makes more sense to save up as much as possible. A down payment has many advantages, as the more you put down, the lower your mortgage will be, which means lower mortgage repayments.

Additionally the higher the down payment is, the more you will be able to pay for a home. Lenders have learned from experience that more homeowners default on their mortgages if a down payment is less than twenty percent of the sale price and for this reason they require you to pay private mortgage insurance until the equity in your home reaches twenty percent of the sale price.

So here are a few helpful tips to help you start saving:

Try saving your tax refund. Change you withholding payoff from 1 to zero. This means your employer will have to pay more to the I.R.S and downgrade you paycheck accordingly. In this way you may receive a larger income tax refund.

Will your parents give you a down payment? The law allows each parent to give a gift of a specific amount without any tax consequences. If this is not possible you may be able to ask them for an unsecured loan, where you give them a better interest rate than they can get from the bank.

If you have served in the armed forces, it is always a good idea to check out government programs, as you may meet the criteria for a loan sponsored by the Veterans Administration.

The government is also running a number of assistance programs for down payments, tailored around the first time homebuyer. There are also neighborhood specific programs to help encourage home ownership in some neighborhoods.

Mortgages 101

The commotion of house hunting is finally over. You found just the right house, and your offer has been accepted. It was a great buy. Now, just one more piece to the puzzle: getting a loan.

Often, buyers are so eager to get this “final piece” behind them, they rush through this portion of the transaction and end up with less-than-ideal terms. In order to avoid this, make sure you take the time to educate yourself about mortgages in general.

A mortgage lender will often work directly with the home buyer. However, mortgage loans vary considerably from bank to bank, lender to lender, and person to person. Many factors determine what’s right for you, including the size of the mortgage, your financial history, the interest rate, and the maturity date of the mortgage.

Globally there are dozens of different types of mortgage loans offered by mortgage lenders, but they all share common features:

• All loans earn interest, which is either fixed (meaning it remains the same during the life of the loan) or variable (meaning at pre-defined periods during the life of the loan it will change).
• Mortgage loans all have a maximum life, or term. This is the amount of years you have to pay back the amount in full. After this you officially own the property and will secure the full deed to the land.
• Mortgage loans set a predefined amount you must pay each pay period. This will also determine how often the mortgage is due, depending on the type of mortgage you secure.

Some mortgages have additional terms, including prepayment penalties if you decide to pay off the loan before the end of the term. So make sure you discuss this with your lender before signing the contract terms of your loan.

Thinking About the Future

If you read my previous post about getting in debt the right way, we talked about how it can be a good idea to hold off on paying down your mortgage as quickly as possible. So instead of paying off your mortgage, you could be using the extra money for investments. And when you use that money for investments now, you will be working towards your future and your retirement. You could be using that money to invest in stocks, or even take out another mortgage on an investment property. Visit here and learn about the different types of investments

Home equity loans will also provide you with cash, but it’s not necessarily a good idea to use the cash for investment. When you compare the interest you would pay on a home equity loan against the return on investment, it doesn’t really make sense. Instead, you could take the cash from a home equity loan to pay off high interest credit cards or loans. Again, you free up more of your monthly income to invest in other things.

Remember, before making any big decision that will impact your financial future, talk with a professional and find out what will work best for you.

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