Home Basics

Owning a home allows you to establish roots and provide a safe place for your family. Your home purchase will also build equity while saving money when compared to the cost of renting.  When done right, a home can be the best decision you’ll ever make.

Take a Methodical Approach

As you shop for your dream home, balance the amount of money that you have saved for the purchase against the amount that you can afford for monthly payments. Choosing that dream home that also fits within your budget can definitely present a challenge.  But it’s worth it to get it right.

 

Ideally, you should save at least 20 percent of the purchase price of the home for the down payment. If you don’t have enough cash for the down payment, check into availability of FHA, VA, and USDA loans or other bank and government resources.

A few quick guidelines can assist with calculating your ability to make monthly payments.

  1. When considering these payments, your maximum household expenses should not exceed 28 percent of your gross monthly income.
  2. Any total debt — including student loans or credit card payments — should stay below 36 percent of your gross monthly income.

After working through those calculations, consider the future. Factors such as the cost of raising children, loss of income, insurance, property taxes, or paying for home repairs can change your budget and alter home buying plans.

Learn the Language of Home Buying

Purchasing a home also requires some familiarity with the language of home buying. Banks and mortgage lenders give loans — called mortgages — to help finance the purchase of your house. In turn, your house becomes the collateral in exchange for the money. Every mortgage payment includes the principal, the interest, taxes, and insurance. If you purchase a home for $150,000, the beginning principal balance equals $150,000. Part of your mortgage agreement involves interest — or the price that you pay to borrow from the lender. You pay property taxes based on the assessed value of the house.

Every lender requires that a home purchase include a homeowner’s insurance policy that covers the house and, sometimes, the property inside the house. Any down payment of less than 20 percent of the house purchase price requires private mortgage insurance or PMI as part of the loan. The PMI protects the lender in the event that you cannot repay the loan and typically costs between 0.5% and 1% of the entire loan amount annually.

Receiving a mortgage requires the signing of a mortgage note. With the signing of the note, you promise to repay the balance of the mortgage plus interest and other possible costs over an established period of time. Banks and mortgage lenders offer 15-year or 30-year mortgage notes. A fifteen-year mortgage charges lower interest rates than a 30-year mortgage and offers an opportunity to save money. However, the fifteen-year note has a higher monthly payments. Why? With a fifteen-year mortgage plan, you have half the tem to pay all the principal back to the lender.

And Then?

Talk with an expert at your bank, calculate the numbers, and make the best decision you can.  Like any adventure, preparation is key and the unknown is part of the fun!