Buying a House You Can Afford

There are many reasons why owning a home is a great idea. Home ownership provides a permanent residence for you and your family and allows you to build long-lasting relationships with neighbors and others within your community. In addition, mortgage payments can help you build financial strength as you build equity in your home, and home improvement projects can increase the value of your home. Whether you are planning on buying a home in the future or ready to make the jump to home ownership now, consider these tips to save you money and enable you to find a house you can afford.

Tip #1:  Maximize Your Down Payment

Buying a home is a major purchase, so treat it as one! Twenty percent of the purchase price is the typical target for a down payment. However, the required down payment will vary based on the type of loan you choose. For example, government-insured loans like VA and USDA require zero-down. Conversely, FHA- backed jumbo loans may be subject to minimum down payments of 25 or 30 percent, depending on buyer credit score and debt-to-income (DTI) ratio. Not only does a larger down payment appeal more to a lender, but more money paid up front saves you money in later years. A larger down payment reduces the loan amount, making it easier to sell or refinance later. What’s more, total interest over the life of a loan is reduced as the down payment goes up. An additional benefit of a larger down payment is a lower monthly payment. This can make budgeting easier and allow you to invest more in savings or retirement from month to month.

Tip #2:  Avoid Private Mortgage Insurance (PMI)

PMI can add substantial costs to a home loan. These costs generally range from 0.5% to 1.5% of the loan amount per year. This would equate to PMI costs between $2,500 and $5,000 annually on a $500,000 mortgage. Moreover, PMI provides protection to the lender in the event you (the buyer) stop making payments on the home loan, but does nothing to protect you as a buyer. Unlike insurance premiums, there is no protection if you cannot make payments. You can still face foreclosure, and you risk losing money in the process. Additionally, PMI can be difficult to cancel once your equity reaches 20%. Lenders may require a written request and a formal appraisal. This process may take time and you will have to continue paying PMI during the process. For FHA backed loans, mortgage insurance cannot be canceled. Rather, removal of PMI must be done through a loan refinance or payment in full.

Tip #3:  Don’t Rely on a Lender to Tell You How Much You Can Afford to Borrow

There are different types of mortgages and many are designed to get buyers into homes. For example, FHA loans give borrowers who do not otherwise qualify for private mortgages a chance to own a home. However, all FHA loans require borrowers to pay two mortgage premiums—an upfront mortgage insurance premium and an annual mortgage insurance premium. With FHA backed loans, you may end up paying more in interest and mortgage insurance than you would with a conventional loan. Therefore, do your part to seek information from multiple lenders, understand the different types of loans, and determine which loan is best suited for your situation and your budget. Keep in mind that the maximum mortgage amount you can get approved for may be more than you can comfortably afford to borrow.