Published in: Mortgages | Sept. 29, 2020
By: Maurie Backman
Ready to buy a place of your own? Not so fast. Ask these questions to avoid costly mistakes.
There's a reason so many buyers are clamoring to purchase homes these days: Mortgage rates have fallen to record lows. If you buy in the near term, there's a good chance you'll lock in an extremely affordable monthly payment on the home you buy. Still, buying a home is a huge commitment, and one you shouldn't take lightly. Before you put in an offer on a home and start reaching out to mortgage lenders, ask yourself these important questions.
As a general rule, your monthly housing payments, including principal and interest on your mortgage, property taxes, homeowners insurance, HOA fees (if applicable), and private mortgage insurance (if applicable) should not exceed 30% of your take-home pay. This means that if you bring home $4,000 a month after taxes, you have a maximum of $1,200 to spend on the aforementioned costs. Make sure you understand exactly how much house you can afford before diving in. If you go overboard, you'll risk falling behind on your mortgage payments or other bills -- launching yourself into a financial mess.
Not sure exactly how to calculate your housing costs? You can use this handy mortgage calculator. Just put in the purchase price of the home you're looking to buy, your estimated down payment, your mortgage rate (you can use today's average rates as a starting point), and your loan term (30 years vs. 20 years vs. 15 years). From there, you'll get a breakdown of your costs. That will help you determine how much you can spend on a home to stay within your personal limit.
Owning a home doesn't just mean paying your mortgage, property taxes, insurance, and the other costs mentioned above. It also means doing your part to keep that home standing. We're talking about maintenance, and it's an unavoidable expense that comes with owning property. The more maintenance you're willing to do yourself, the less money you'll spend. Think about your availability. If you work long hours and tend to be busy on weekends, you'll probably have to pay to outsource that maintenance -- which will add to your costs. On the other hand, if your schedule is more flexible, you may be able to tackle much of that upkeep yourself. That can drive your costs down.
9 in 10 Americans can qualify to refinance their mortgage. With mortgage rates plummeting to multi-decade lows, there's no better time to cut your monthly mortgage payment.
As a general rule, you should expect to spend 1% to 4% of your home's value on maintenance each year. For a $300,000 home, that means $3,000 to $12,000 a year, or $250 to $1,000 per month. If you'll be outsourcing most of your maintenance, expect to inch closer to the higher end of that range. And definitely budget more if the home you're buying is a bit older and therefore more likely to need more work.
When you own a home, you never know when costly repairs could pop up. That's why it's crucial to have a solid emergency fund before moving forward with a home purchase.
You should, at a minimum, aim to have six months' worth of living expenses in the bank before buying a home, and that's after you've made your down payment and covered your closing and moving costs. That way, you won't rack up debt due to repairs, which could hurt you in the long run.
Buying a home is a big deal, so make sure you're financially ready. And if it turns out you aren't, put it off. While mortgage rates today may be exceptionally low, you're better off waiting until you're in a stronger position to afford a home than pushing yourself and regretting it after the fact.
Chances are, mortgage rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase. Click here to get started by scanning the market for your best rate.
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