You’re house hunting and wondering what you can afford. Maybe the better question is not how much house you can afford; but rather, how much you want to allocate to buying and maintaining a home. In other posts, we’ve talked about the importance of researching any major purchase while curbing the emotion. It’s even more essential when buying a house.
An honest look at your finances.
When you visit an ECCU mortgage specialist, we make the process comfortable and easy, and you learn upfront what you can afford. We’ll review what you’ve saved, as well as your current income and debt situation for determining a ‘debt-to-income’ ratio. The more you’ve saved, and the lower your debt-to-income ratio, the more house you can potentially afford.
We’ll also look at your budget. What’s your cash flow like? Will you need to cut back if you buy at the top of your range? If you’re unsure, we recommend tracking your expenses for a month to see if there’s a pattern to your spending. You can also see how the mortgage payment impacts your budget.
How much debt (or risk) can you handle?
One rule of thumb is not to let mortgage payments exceed 28 percent of gross income. If you’re conservative, try using a payment guideline closer to 15 or 20 percent of gross income. The conservative route will help ensure you have money left over for other pursuits or hobbies, family expenses, or even to save towards college or retirement.
Choosing the right mortgage.
Like most lenders, we offer traditional terms of 10 to 30 years with a range of fixed rates. Flexible five-year balloon loans are also available enabling you to refinance at the term’s end, as well as 3% down payment plans. To help you sift through the options, we’ll start by determining your needs. For example, what type of home do you envision owning? Will your needs be changing? Are you looking for a starter home or something long-term? The answers will impact the type of mortgage you choose and amount you wish to finance.
We’ll also find out where your comfort level is with payments, and discuss rates, terms, closing costs and upfront fees, called prepaids. Using our online mortgage calculator, we can help you to compare payment options to see what feels comfortable with your budget.
Mortgage interest rates today.
A large component of your monthly payment is based on the interest rate. Even a half percent can make a difference in your payment. Take this example:
$150,000 financed at 4.5% for 30 years = $760/month
$150,000 financed at 4.0% for 30 years = $716/month
Try more scenarios using our online mortgage calculator.
The realities of home ownership.
Many first-time home buyers don’t fully realize the ramifications of home ownership. The key is determining how much time and money you want to devote to your home. Not just the monthly payment, but upkeep, utilities, and a multitude of other factors. Don’t be afraid to ask yourself some tough questions; it will help put things in perspective.
• How much house can I afford? It takes not only money to buy and maintain a home, but time and energy.
• What are my monthly expenses? These are the non-negotiable items like homeowners insurance, taxes, and utilities including heat, water, and electricity.
• What have I overlooked? More square footage usually means higher maintenance costs; it simply costs more to re-carpet, paint or remodel 4,000 square feet vs. 2,000 square feet.
• Do I want lots of space or to keep things streamlined? A larger home enables you to have more furnishings, space to relax, and privacy; it also costs more to equip and maintain. A smaller home allows you to streamline belongings and is easier and less expensive to maintain.
• How long do I plan to stay? If it’s less than five years, pick the right mortgage and amount to spend; and consider a home that will be easy to resell.
A trick to thinking big.
If you’re still unsure about budgeting, try living on your ‘big home budget’ for six months. See how it feels to have that amount of financial responsibility before committing to it. Write down your expenses and allocate time for the chores. You can see firsthand the impact home ownership has on your budget and time and feel more confident in your final decision.
Have more questions?
As an ECCU member, we’re here to guide you from beginning to end in your home buying journey. Learn more about our mortgages at http://www.eccu1.org/lending/mortgages, get preapproved, or call one of our experts at 269.544.3105.