Guide to Mortgage for First-Time Homebuyers

A house purchase is one of the most significant investments you can ever have. But, home buying is a thorough process. Finding out the right price for you is the first step in securing a dream house. Figure out how much house you can afford with the help of this quick guide.

Calculate Based On Income

Knowing how much house you can afford starts by crunching a few numbers. Don’t fret. It does not need a math expert. Let us be your guide as we walk you through it step-by-step.

Just a gentle reminder, talk to your spouse first about it. Make sure you’re both on the same page. After all, it will be you and your partner’s home sweet home.

Step 1. Add up total monthly income.

For married couples, sum up all the monthly paycheck. If you bring home $2,400 a month, while your spouse brings $2,600 a month, the total income monthly is $5,000.

Step 2. Get the maximum mortgage payment.

Multiply the monthly total take-home pay by 25%. If you and your partner earn $5,000 a month, you’ll be paying no more than $1,250 for a monthly house payment.

The calculation shows a ballpark figure for how much house you can afford. It depends on your down payment amount and the maximum house payment.

Step 3. Use a mortgage calculator.

Now, you determine the budget. A mortgage calculator shows you a better picture. It is an automated tool that enables you to identify financial implications. Any changes in one or more variables significantly affect the mortgage financing arrangement.

Let’s stick with the $5,000 monthly income example. If you opt a 15-year fixed-rate mortgage, you’re likely to afford the following:

  • A home with $187,767 and a 10% down payment which costs $18,777
  • A home with $211,238 and a 20% down payment which costs $42,248
  • A home with $241,415 and a 30% down payment which costs $72,424
  • A home with $281,650 and a 40% down payment which costs $112,660

Keep in mind that this is just a rough estimation. Property taxes and homeowner’s insurance are on top of the monthly payment. If you’re buying a home from a homeowner’s association (HOA), include other fees as well.

For example, you get a mortgage amount of $211,238 with a 10% down payment at a 4% interest rate. Adding $194 for tax and $71 for insurance will result in $1,515. It exceeds your maximum monthly payment of $1,250. Find a way to lower it down within your housing budget. $172,600 is the price goal of the house you can afford.

Get a better view of the cost impact on home-buying budget with a mortgage calculator. Key in the mortgage amount, interest rate and down payment and see which house budget works for you.

Step 4. Factor in homeownership cost

After knowing the mortgage payment, save up for other home expenses. First-time homeowners do some home upgrades, set aside funds to cover it. Protect yourself from nasty surprises. Build room in your monthly budget. Save for increased utilities, new appliances, ongoing repairs, and routine services.

Getting down with your pen, paper, and mortgage calculator (or reverse mortgage calculator) lighten up the home buying experience. You now have an idea of how much house you can afford.

Maximize Down Payment

Down payment creates a massive impact on how much home you can afford. The more cash you pay down, the less money you need to finance. As a result, you pay lower mortgage payments each month. Plus! A faster timeline to repay your home loan.

Take time to save for a significant down payment. Better if it’s 20% or more. This way, you won’t have to pay for Private Mortgage Insurance (PMI) – your protection from foreclosure if you fail to make on-time payments. But it would cost you.

You need to maximize your down payment. It saves you from the suffocating budget-crushing mortgage. Also, it keeps you from paying endless interests and fees.

Include Budget Closing Costs

Besides the down payment, you need to save up for a hefty closing cost – about 4% of the purchase home price. It covers crucial parts of the home buying process. It includes appraisal fees, home inspections, credit reports, attorneys, and homeowners’ insurance.

Let’s say you purchase a $200,000 home. Multiply it by 4% to get an estimated closing cost ($8,000). Then, add the 20% down payment ($40,000). The total cash you need is $48,000.

Neglecting the closing costs affects your budget. You may hold off your house purchase until you have the extra cash. Or you find a lower price range for your home. Whichever you choose, always give the biggest down payment as possible. The bigger it is, the lesser mortgage you owe.

Choose the Right Mortgage Option

Different types of mortgages assist you in paying a home, regardless of your financial situation. Take a closer look and see how much it costs you. Some mortgages charge more interests and fees. Also, they keep you in debt for decades longer get the right mortgage plan. Set boundaries upfront to find a house within your budget.

Fixed-rate conventional loan

Utilise this mortgage option for securing your interest rate for the loan’s life. It keeps you protected from the rising rates of an adjustable-rate loan. You don’t have to worry about paying more interest since it is predetermined already.

15-year term

In comparison to a 30-year term, a 15-year span has a higher monthly payment. Nevertheless, it saves you from paying thousands in interest. It saves you money and time from altogether paying off your house.

Monthly payment

When choosing monthly payment, make sure that it is no more than 25% of your monthly take-home pay. If not, you’ll struggle juggling other expenses aside from your home purchase. Paying within your mortgage capacity leaves plenty of room for savings and retirement.

Home buying is fun and exciting, especially if you’ve been dreaming about it. However, it needs a lot of patience, efforts, time, and a great deal of money. But do not forget that buying a home is more than the price of the house itself. You also need appliances and furniture. If you moved in and you need more things to get comfy, consider getting a flexible loan from a licensed cash mart lender like lucky plaza money lender. This way, you can choose which payment plan can best fit your needs as a new homeowner. Stay focused and calculate how much house you can afford. Let this quick guide be your light.