Show me the money:
How to determine if you have enough to buy a home.
Owning a home is the American dream. But if the economic difficulties over the past few years has taught us anything it is that home ownership is not affordable or a wise option for everyone. The proof lies in the sub-prime loan debacle, when aggressive lenders convinced homeowners that they could afford homes–even when they had no money to put down or the necessary income to support the loan as interest rates increased. As a result, homes were lost, dreams were shattered and our economy was driven into the deepest recession since the Great Depression.
So how do you know if you can afford to buy a home? And how much money do you need? Ultimately, you know better than anyone whether you can afford a home. Before you talk with an agent or lender think about the following factors, which affect your ability to afford a home:
- The price of the home you want. Prices vary considerably by the size of the house, its amenities, and the location. Determine what size of home your really need and shop around to see the price range.
- Your employment history. Is your job situation steady? Do you have a strong work history? If you are unsure about the stability of your job, it is not a good idea to buy a home.
- The down payment you have. Keep in mind that you will need to put between 3 and 20% of the sales price down as down payment. In general, the higher the down payment you can make, the easier it is to qualify for a loan, and the better the interest rate is–which results in a lower monthly payment. In addition, if you do not have 20% down payment then you are required to pay Private Mortgage Insurance, which will drive up your monthly payment. Beside down payment closing costs also need to be considered and discussed with the lender and agent.
- How much can you afford? Experts say that you can generally afford a home that costs about two-and-one-half times your annual salary. Most mortgage lenders and financial institutions offer free calculators online that can help you determine how much you can afford to pay. However, other debt if applicable may need to be considered when calculating the maximum purchase price.
- Understand the relationship between rates and points. With most mortgages, you have the option to pay points to get a lower interest. A point is 1% of the amount you borrow. The more points you pay up front, the lower your rate will be. If you plan on owning the house for several years, it may be wise to pay points to get the best interest rate. The lower interest rate will save you more in the long run, but cost more up front.
Any homeowner will tell you that there are many benefits to owning a home; however, the last thing you want to do is fall in love with and buy a home you simply cannot afford. Carefully review your budget as well as your job and financial situations to ensure that you will be able to afford the home. No matter what anyone tells you, you are the expert on what you can manage. Owning a home you can afford will be a great thing, while owning a home you cannot afford will be a bad dream.
To speak with a knowledgeable UCCU mortgage professional about your unique situation, stop by your local branch. Utah Community Credit Union is ready to help with all of your home financing needs and help answer all the questions you may have!