Why is homeownership considered one of the biggest risks a person could ever make?
Homeownership has its many advantages, and before you get your keys to your brand new home, the process is painful and tiresome. First, homeownership comes with a lot of new expenses you didn’t know about as a renter. Therefore, it is important to learn how to create your budget, in the end, it will be worth it. While renting, you may be carefree with your finances and avoid budgeting, you don’t have to worry about paying any property taxes or insurance. Owning a home will change that completely.
As a homeowner, one thing you will notice is that your spending habits will change. Your monthly spending starts with a check to pay for the mortgage. In a month, your mortgage payment typically may be your biggest expense and is considered by many to be the most important payment after all who would want to lose a roof over their head? To be able to manage your finance frugally, you have to know how to budget which ultimately ensures that all of the expenses of homeownership are catered for.
Purchasing a house will take a toll on your bank account both on the day you decide to close the transaction and every month that follows with recurring home expenses. Many first time homebuyers have this notion that once they settle the downpayment on their home, the only thing left to worry about is the mortgage payment, which they think is a regular cost. There are so many other expenses that makeup homeownership. Even while in the budgeting stage, there is a rule you are not supposed to ignore, never budget or purchase a house that you cannot afford. However, the term “affordable” will differ from one buyer to another. Some buyers will buy on the high end of the list price and some others will buy on the lower end.
Figuring out your affordability will require more than getting a preapproval letter from your mortgage lender. I have worked with a lot of first-time homebuyers and one thing I have noted common to them all is that they tend to shop on the amount a lender is willing to advance them, not considering other expenses, which eventually sets them on a financial hardship, even a potential foreclosure when they fail to afford a monthly payment to service their mortgage.
Follow a rule
One of the easiest rules that have always worked is the 25% rule. It is easiest to calculate your homebuying budget. Basically, it dictates that your mortgage shouldn’t be more than 25% of your gross income each month. Others will suggest the 50/30/20 rule. 50% of your household income goes to your needs, 30% to your wants and 20% to debt repayment and savings. The FHA is known to be generous, allowing their consumers to spend up to 29% of their gross income on a mortgage. However, that should not blind you to forget that you have some other debts, you have to consider them and add them to your mortgage payment which will help you determine what you can truly afford.
Homeownership is not just about mortgage
The expenses for homeownership goes beyond the mortgage. You should always remember that. You may have already been covering other household expenses, for instance, the utility bills, with homeownership, be prepared for many other homeownership costs. Getting preapproved for a loan is one of the most important steps in homeownership, but it is not the only consideration. Some of the expenses you should be prepared for are; real estate taxes and homeowners insurance; homeowners association; and home maintenance and upkeep. All of these costs and other outlays have to be considered when determining how much home you can afford. These expenses can add greatly to the monthly outlays, making a rather affordable home pricier.
Consider your Downpayment
You should know that downpayment should lay out terms of the purchase. In most cases, the lenders are looking for a person who can be able to provide 20% of the purchase price in cash. However, with The Power Is Now VIP agents, you don’t have to have a down payment. Our VIP agents will work with you even if you don’t have the downpayment. Find out more here. For most other lenders, people having low downpayments often must also shoulder the extra expenses of private mortgage insurance (PMI). PMI means that the monthly mortgage payment will go up by anywhere from 0.3% to 1.2% of the loan.
To determine your PMI, a lot has to be taken into account, from your credit score, the size of the home and the potential of the property to appreciate among many other factors. The more you can swing on your downpayment, the lesser the interest rate you’ll pay over the life of the loan, the opposite is true.
The amount you put up for your downpayment should also influence the house you buy. If you have enough to meet the 20% downpayment on the home but 10% on another, then go for the cheaper one.
Choose a Property you’re Comfortable With
When considering the affordability of a house, you have to consider the state of the house and the size of the property. Remember that large isn’t always good. Factor everything especially the utility bills for the property you’re considering and have a construction expert estimate the fixing costs if any needed. While homeownership is part of the American dream, it can quickly turn into a nightmare if you do not budget properly.