If you’re considering whether or not to buy your first home, it 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’s 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 important question remains: What mortgage amount could you afford?
A qualified financial professional can help you analyze your situation. However, you can also use the following worksheet to help you 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 ________
Child care ________
Charitable donations ________
Total Expenses ________
Subtract total expenses from total income ________
This amount is your discretionary income.
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 can go toward a mortgage payment. Remember to budget for the additional expenses that come with home ownership, including utilities, property taxes, homeowner’s insurance, and home maintenance.
Once you’ve determined your budget, you’re in a better position to determine 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. An ARM has an interest rate that can fluctuate with the market and the economy.
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. 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 to consider:
- Explore the possibility of buying a less expensive purchase, such as a condo or smaller home that may need some 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 timeframe.
- Individual Retirement Accounts (IRAs) allow for a penalty-free qualified first-time homebuyer distribution up to $10,000 toward the purchase of a first home. Married couples may 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 withdrawing from retirement accounts has the potential to affect the amount you’re 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).
With a little research and creativity, and the help of a qualified financial professional, you can become fully prepared for the steps ahead when buying a home for the first time. Such deliberation may take some time, but the multiple rewards of homeownership can make it worth every effort.