How much can I afford?
A general guideline is 1/4th of your total monthly income should be used for the total house payment. In other words, if you make $4000 a month, $1000 should go towards principal, interest, property taxes, mortgage insurance, homeowners insurance, and condo or homeowner association fees.
1/3rd of your total income should be used for the total house payment and all your recurring debt such as credit cards and car payments. FYI - Utilities, car insurance, and food, are not part of this calculation.
Deciding how much house you can afford is a personal decision, but remember, lenders make the rules on the maximum amount you can afford. Many factors come into play. How much can I borrow? How much can I put toward my down payment? What size monthly payment can I afford?
There are no black and white answers to these questions because there are many factors that can vary. Its a matter of give and take. If you plan on a 30 year mortgage, you can probably make a lower down payment (or perhaps no down payment at all such as a USDA or VA loan) and still manage the monthly payments. If, on the other hand, you plan on a 15 year mortgage, you'll probably want to make a larger down payment to keep your monthly payments in line with what you can afford.
There are a lot of variables that are considered, and I will guide you through the jungle of variables and make sure your dream comes true.
A special word about loan terms. No one offers you an insurance policy on mortgage loan payments. I always advise my clients to take a 30 year mortgage, as their own built in insurance policy. You can always make a 15 year mortgage payment, with the 30 year loan term. Then, if you run into a "bump in the road" in the future, let's say becoming unemployed or become ill, you can always back down and pay the original 30 year payment.
It's hard to refinance in the middle of a crisis. You would most likely not be able to qualify for a mortgage loan when you run over the "bump" so you need to provide your own "fail-safe system" now...just in case! You only have to make the original 30 year payment (without refinancing). At this point, you are really glad you took a 30 year loan, not a 15 year and you don't have to pay the refinancing costs either - get my point! Who wants to eat peanut butter and jelly sandwiches to pay for that 15 year loan when you thought you would never run into a "bump in the road"? Prepare for the worst, and hopefully nothing bad will happen - but if it does, you have given yourself a chance to get through it easier!
Also, run the numbers. If you took the difference of making a 30 year payment and a 15 year payment, you could take the difference in the payments, and instead of paying the mortgage the extra payment, you placed it in a money market account, within 10 years you would have a nice nest egg of money available to you in your account. This would give you liquid cash for your use in case of an emergency, and it is not stuck in the equity of your home where it is difficult and costly to get to. Worse case scenario, if you become unemployed, you have a reserve to live off of for a while in the savings account! Remember, equity goes up and down just like the interest in a bank account. We just need to look back to 2008 and remember the home values crashing. Values in Florida in 2016 are still not where they were before the crash. So why not keep that extra money in a bank account where it is readily available instead?
Tax Advantages. The IRS gives you a tax credit on your tax returns for the interest you pay on your mortgage. Generally, the interest you paid over the year on a 30 year term is higher than a 15 year term loan. If you receive a tax write off you can put the money in your pocket for a rainy day, a vacation, or your children's college fund.
How large a down payment will I need?
Many Buyers look at their cash on hand as their only source for their down payment. There are other options as well.
One way to fund or partially fund a down payment is by using a gift. Parents, grandparents, and other family members are often eager to help by making a cash gift toward the purchase of your home.
There are, from time to time, State and County down payment assistance programs that are available, usually in late summer and early fall. And, of course, if you are selling a home, the equity you've built up can be applied to your new down payment.
But these are not your only options. We can help you explore all your down payment options, including low down payment program with as little as 3%, and 100% mortgage financing options (USDA & VA) that might be right for you.
What size monthly payment can I really afford?
When determining what size monthly payment you can afford, you'll want to consider what other monthly expenses you have. Tangible expenses such as car payments, day care and utility bills, all play a role in how large a monthly payment you can afford.
There are also the intangible expenses or lifestyle expenses that you'll want to consider. Things such as dining out, travel and when you buy your next car can effect how much you can afford. Are you willing to curtail or delay some of these expenses in order to afford a larger monthly payment? If you like your lifestyle now, perhaps you want to look at a smaller monthly payment. You have that choice. Let's face it, if you move into a large house and it has lots of empty closets, eventually you will fill them with all the things you don't need rather than clean them out! And, if you give up the lifestyle you really like, will you regret that decision? Think forward and keep in mind this house is an investment...and should not be bought with emotion (easier said then done)!
The real question is, do you know where your money is going? If not, then track your expenses and buy a copy of Quicken or some other program so you can download your bank statements and sort your expenses to see where you money goes. You may be very surprised at how much you are spending, and where! This is real life, and flying by the seat of your pants, well, sometimes you loose your pants, if you know what I mean! There are a lot of people out there who have lost their pants in the past, and I don't want you to be one of them!
Most money advisors will suggest you have a minimum of 6 months to 1 year of living expenses in savings. This should not be used for the down payment of a home in a perfect world! If you need help in adjusting your spending, track where it goes, and then I will meet with you to give a hand on how start tracking your money and how to focus on the big picture. It is easier than you think, and I am always here to help!
How much can I borrow?
This is a question you'll want to get answered before you begin your home search. I am here to help you. Please feel free to use my mortgage calculators on my Home Page. They will help you see how your down payment, monthly payment and the amount you borrow are all inter-related. Then, give me a call and I will share with you, in detail, all the other items, that you didn't know you needed to know! I will show you the guidelines and make sure you know you are getting the best rate available by sharing with you the various rates sheets. I will take your hand and walk you through this process and make sure your dream comes true.
If this were easy, we would all be doing it on line ourselves now, wouldn't we! This is presently as complicated as the legal profession. It could be because the government and their lawyers have had their hands in this process for a long time. It's a jungle out there...let me be your guide!
When you are ready to get started, simply complete the form below, give me a call, or email me.
Sherry Bitner - 941-504-1445 or Sherry@SherryBitner.com