As you look at purchasing a new home, the first thing to consider is your budget. You want to have a clear outline of what you can afford both upfront and as far as monthly payments go.
You can utilize a house payment calculator to get a roundabout idea. Here is what you should take into consideration when budgeting for a mortgage.
Determine What You Can Afford
A good way to get a price range for an affordable home is to multiply your annual gross income by 2.5. This would be a purchasing price that would be comfortable considering monthly expenses you may incur.
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Think of the expenses outside the monthly mortgage payment, such as a down payment and closing costs.
Figure out what your debt-to-income ratio is. A typical rule of thumb is to make sure your mortgage payment does not exceed 28 percent of your gross monthly income.
After this add up your other monthly expenses, from utilities to dining out habits. Add that to a mortgage payment to determine your debt for the month and compare it to your gross income.
Figure Out the Ideal Down Payment
Your down payment can range from anywhere between 3 and 20 percent. It will depend on the type of mortgage you end up with as well as your credit score.
Keep in mind that a down payment of less than 20 percent typically means lenders will require you to have private mortgage insurance until you build 20 percent equity in your home. This is an additional cost you’ll have to figure into the overall financial picture.
Account for New and Ongoing Costs
Some expenses pop up out of nowhere or vary from month to month.
Take into consideration budgeting for things like new furniture or appliances, hiring movers, initial cosmetic updates like paint, and a sum of money set aside in case any emergencies arise early on in home ownership.
You will also want to factor in upkeep of the property, both inside and outside.
Keep in mind that your mortgage includes things like property taxes, interest, escrow payments, and homeowners’ association fees, if applicable.
Prepare for Closing Costs
While sellers take some of the closing cost responsibility there are still things you’ll need to pay for.
Closing costs include a credit report fee, appraisal, tax services fee, and lender’s origination fee.
Take a hard look at what typical monthly expenses look like. Can you cut out your gym membership or a streaming service? Are you able to prepare more meals at home as opposed to going out to eat?
You might also look at things like car insurance and internet service to determine if you can find a cheaper rate elsewhere.