You found your dream home and decided to advance in the buying process. How should you know if you can safely afford a home?
Buying a home is fulfilling yet a life-long financial commitment. It requires careful knowledge of all the processes and evaluating how much money you can really bring in. If you’ve been actively looking for homes and wonder how much you can afford, it’s good to start by knowing what fees are involved in buying a home.
House cost is not a one-size-fits-all. The price of a house today differs from the price of that same house 10 or more years ago. Home prices vary due to some contributing factors such as economic growth, interest rates, and the demand and availability of homes, to name a few.
Here are some of the fees you need to know about before buying a home:
Down payment is most likely the biggest expense and one of the toughest parts of the home buying process. Some loans, like USDA and VA loans, require no money down but at most, homebuyers will need a down payment of at least 3% (for conventional loans) or 3.5% (on FHA loans).
In some cases, a 20% down payment is more favorable. However, saving up 20% for down payment is a bit burdensome, especially if you’re a first time home buyer. Though it shouldn’t always be the option to settle on, saving 20% for down payment offers a lot of benefits. According to Customer Financial Protection Bureau, “there are a variety of mortgage options that allow you to make a down payment of less than 20 percent, but lower down payment loans are typically more expensive”. There are always pro’s and con’s to what amount you can afford for your down payment; it all comes down to what really works for you.
Closing costs are charges and fees to service providers who helped in the homebuying process both home buyers and sellers pay when the purchase is finalized. Normally, the buyer pays for mortgage insurance, homeowner’s insurance, appraisal fees and property taxes, while the seller covers ownership transfer fees and real estate agent commission. Typically, closing costs sums around 3% to 5% of the home’s purchase price and are often financed through lender credits. This lowers upfront costs but increases monthly mortgage payments in return.
The monthly mortgage cost varies based on the size of the house and where you live. According to the U.S. Census Bureau, the median monthly mortgage payment is just over $1,500. That, of course, is just an estimated figure.
In the event of losses or damages in your property, a homeowner’s insurance will get you covered. Events like fire or burglary can happen unexpectedly so it is important that you get insured. Also, when you apply for a mortgage, your lender will require proof that your property is protected.
A property appraisal is an estimate of a property’s value that is based on factors such as location, amenities, structural condition and recent sales of similar local properties. When applying for a housing mortgage loan, your lender will want to make sure the property you’re buying is worth the amount you’re willing to spend on it—checking the house for anything that can devalue or increase its worth—thus, requiring home appraisal. The cost of home appraisal is determined by the property value, location, and size of the property.
Property tax is a tax on real property paid annually based on the property value. The tax base is computed in proportion to the value of either the land excluding the building, the land and the building, including various factors such as its location.
Services involved in the home buying process include home inspectors, attorneys and other service providers. Paying for third-party fees usually don’t cost that much; it ranges around $20 to a few hundred dollars.
So, how to determine how much home you can afford?
A rule of thumb is following the 28%/36% rule to calculate how much house you can afford. As the figure suggests, you shouldn’t be spending more than 28% of your gross monthly income on home-related expenses and 36% on your debt-to-income ratio such as your mortgage, credit cards and other loans like auto and student loans (1). If your gross monthly income and home expenses are in good shape, you can safely bear the expense of purchasing a home.
Deciding when to buy a home
If you think 2021 is your year to buy a home, the historical low mortgage rates can be a big motivator to act right away. In 2020 alone, rates hit new record-lows 16 times, and the trend continued into the early part of this year (2). As of February 4, 2021, mortgage rates remained flat and near record lows (3). This is a high home-buying opportunity for hopeful homebuyers like you.
What if you decide to put your plans on hold? According to Lawrence Yun, “mortgage rates will remain stable in 2021 — with the potential for a slight increase from the all-time low of 2.71% we saw in 2020 for 30-year, fixed rate mortgages”. This means mortgage rates will remain promising. However, acting sooner than later can be a surefire win.Your call!
Home buying is an exciting experience but you should also be prepared financially. There’s still a long list of expenses you need to know before buying a home. As long as everything is settled, you’ll safely afford that home you’ve always dreamed of.
If you would like a Real Estate Professional to guide you through the buying process feel free to contact us at: