Buying a Home - Concerns About the Economy
Hello, back again with some more tips on buying a home and preserving your finances.
Don't we all get excited about the prospect of buying something new? More so when it's a big-ticket item? A house becomes a home and I'll be the first to admit the temptation to go all-out is huge. Even greater for those with families and children.
A lot of real estate agents would like you to buy as much home as you can afford, as their commission check is naturally bigger. However, agents that genuinely care about their clients place their commission amount on the back-burner in favor of giving sound guidance to buyers when it comes to finances.
Most personal bankruptcies are filed over as little as a $300 per month cash flow issue. Not long ago, we lived in a world of "super-size-it" thinking from food to cars to housing. Let's take a step back and flex our finance muscles for a moment.
First of all, consider how much space you really need, and when you might possibly want to upgrade for more space. It can be less expensive to add a room addition than to buy another property a few years down the road, but if you're starting out on of the best things you can do is not max your mortgage.
Maxing the Mortgage or Savvy Saving?
Let's take a $200,000 mortgage pre-approval and you're going to max that out. First, loans are made based on credit, but also on income-to-debt ratios. Though lenders follow these guidelines, that doesn't take into consideration a major change in national economy, pay cuts or sudden job loss. What if you're injured and on medical leave or disability for a while? Things can get rough fast and heartbreaking to lose a home months to a few short years after making a purchase.
On a $200,000 loan your PITI (Principle, Interest, Taxes and Insurance) is included in your house payment. Taxes and insurance can vary quite a bit depending on your location, so let's just work with principle and interest for the moment.
Assuming a 10% downpayment, the amount financed is $180,000 or $912.03 per month at 4.5% interest or $10,944 annually. Depending on where you're buying, that can be a lot of house, particularly in the Midwest.
Now, that's maxing the mortgage you're approved for, but let's say purchase at 80% of your approval and buy at $160,000 with 10% down, the financed portion is $144,000, with a principle and interest payment of $729.63 or $8,755.56 annually, a difference of $182.24 per month or $2,188.80 per year.
It may not seem that significant now, but in a tight spot a little more cash flow can go a long way. Use this mortgage calculator to get an idea of what's comfortably affordable.
Keep in mind, you also have property taxes and possibly private mortgage insurance built into your payment, and other expenses like home owner's insurance and maintenance to consider. For a better understanding of more of the expenses incurred with buying a home, learn more about some of the other more obscure costs: