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Home Buying - Budget
Buying a home is a big investment and something that most people strive for as an adult. Before you start your search for the perfect home, it is important that you know how much home you can buy based on your budget. It is also important to know that in addition to the monthly mortgage payment, owning a home comes with other expenses, often unexpected. Therefore, when determining your budget, you need to consider everything so you can enjoy your home without feeling trapped by the expenses.

To start, there is the deposit to think about, which is one aspect of your budget. Typically, you would be expected to put down anywhere from 5% to 10%, depending on the lender. Keep in mind that the more you can put down, the less amount of money you will have to finance and pay interest on, which gives you instant equity in the home, less coming out of your paycheck, and less money being overall.

For example, if you find a home for sale that costs $200,000. If you work with a lender who finances 90% of the loan, that means you would need to put 10% down. However, keep in mind that many different programs exist. Some will lend 95% of the home value, meaning you would only need a 5% down payment. This is why working with a good lender is so important. Generally, the reputable lender will offer more options than what you might be offered through the bank or a smaller lender.

The mortgage insurance is also important. When shopping around for rates, look at various insurance companies. The difference can be staggering. This figure is usually built into your mortgage payment although you can choose in some instances to pay them separate. Typically, the greater the coverage, the more you will probably pay. The more you pay, the higher your monthly mortgage payment. Keep in mind that if you already have an insurance agent that handles your car insurance or renter’s insurance, you might want to start there, as they will usually be willing to work hard to get you the best insurance at the best price. However, before you make any final decision, check several options.

Interest rate is another consideration. In the current market, interest rates are running anywhere from 5% to 7%, which is good. However, by taking your time to shop around with different banks or lending institutions, you might be able to secure the lower end of the interest rate or better. Again, the lower the interest rate secured, the lower your monthly mortgage payment.

When you get ready to start shopping for your home, you should get “pre-approved.” Being pre-approved is different from “pre-qualified”, giving you a huge advantage when shopping for your home. Pre-qualified means that your lender has looked over your income versus debt ratios and determined that you could “qualify” for a home around $150,000 or whatever the price may be. However, being pre-approved means that you have actually received the loan in your price range ahead of time. The advantage is that when you find a home you like, there is no waiting or concern about being approved. This is a huge advantage when shopping for homes, especially when going against other people interested in the same home. In other words, if the seller knows, you already have funding available; they will be more apt to choose your offer over the offer of another person.

Finally, you need to think about closing costs. Depending on the transaction, your closing costs could be substantial. A good real estate agent will work to get you the best deal, which might mean talking the seller into paying some of the closing cost or points. The important thing to remember about closing is that there will be one and that means money. Therefore, in addition to your deposit, be sure before shopping you have adequate funds set aside for the closing as well.

 
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