Contemplating whether or not to buy your first home can be an exciting and time-consuming process. For many, the purchase of a home is the largest purchase they will ever make. Therefore, it is not a decision to be taken lightly. If you feel that you will be better off financially as an owner instead of a renter, one question remains: What mortgage amount can you afford?
A financial professional can help you analyze your situation. With his or her help, use the following worksheet to arrive at an estimate:
Job-related income ________
Investment income ________
Yearly bonuses ________
Additional income ________
Yearly taxes ________
Monthly savings ________
Medical bills ________
Car payments ________
Car expenses ________
Credit card bills ________
Student loans ________
Additional loans ________
Day care ________
Charitable donations ________
Total Expenses ________
Subtract total expenses
from total income ________
This amount is your discretionary income.
divided by 12 ________
This amount is your monthly disposable income after expenses have been paid and savings deposits have been made. Now that you know the amount available, you can decide how much will go toward a mortgage payment. Don't forget to budget for the additional expenses that come with homeownership, including utilities, property taxes, homeowners insurance, and home maintenance.
Once you've determined your budget, you can decide on the type of mortgage that best suits your needs. Mortgages come in two basic forms: the fixed-rate mortgage and the adjustable rate mortgage (ARM). A fixed-rate mortgage has a fixed interest rate that never changes, and your loan payment will remain the same for the duration of the loan. On the other hand, an ARM has an interest rate that can fluctuate with the market and the economy. The rate increase is usually limited to a specified number of points per year and can never go higher than the cap, which defines how many total points the interest rate can increase over the life of the loan.
Obtaining a mortgage is often half the battle. Another challenging aspect of buying a first home is the task of saving toward a down payment. Given the current credit environment, down payment requirements are higher than they were just a few years ago. Generally, the more money you put down, the better the interest rate you can receive. If the amount of your deposit is under 20%, your lender may also require private mortgage insurance (PMI). If a 20% deposit seems out of reach, here are some points worth consideration:
- Explore the possibility of buying a less expensive condo or house that needs do-it-yourself repairs. Sometimes even the simplest home improvements can greatly increase a home's value.
- A lease-option contract will allow you to rent a home for a certain amount of time, with the option to buy at a specific price within a given time frame.
- Individual Retirement Accounts (IRAs) allow for a penalty-free $10,000 withdrawal toward the purchase of a first home. Married couples can withdraw $10,000 each. For traditional IRAs, withdrawals will be subject to taxation, and for Roth IRAs, the five-year ownership requirement must be met to avoid taxes and penalties. It should be noted that borrowing from retirement accounts has the potential to affect the amount you are able to save for retirement. The importance of a disciplined savings program cannot be emphasized enough in view of your overall financial situation.
- Borrowers who have difficulty meeting stricter lending requirements may be able to secure a loan through the Federal Housing Administration (FHA).
There are many things to consider when buying a home for the first time. With a little research and creativity, and the help of a financial professional, you can become an educated consumer who is fully prepared for the steps ahead. Such deliberation may take some time, but the rewards of home ownership can make it worth every effort.