Your “dream home” becomes a nightmare when you end up “house poor”, with most of your money going to pay for the mortgage and little left over for enjoyment. When buying a home, you need to be practical and realistic. Over -extending yourself financially is the quickest way to destroy the excitement of owning your own home. A real estate professional can help you find the home of your dreams; a REALTOR® can also assist you in evaluating mortgage options and obtain financing at the most attractive prevailing rate. In the meantime, here are some ways to determine your “affordability quotient”.
What You Can Afford to Buy
Setting a maximum price range is more important than simply establishing an upper price limit because unanticipated costs could push you into the “house poor” danger zone. To determine your “affordability” price range, you must calculate two amounts: the amount of cash you can afford to put towards the purchase (the down payment) and the maximum amount of loan (mortgage) you can comfortably carry.
About the Downpayment
A mortgage covers the difference between the purchase price and your down payment. The larger the down payment, the less you have to borrow, the smaller your monthly mortgage payment, and the lower your cost of interest over the term of the mortgage. So it probably makes sense to put down as much of your own money as possible.
How Much You Can Afford to Borrow
The first step towards establishing a maximum mortgage limit is to calculate a monthly payment you can afford. Financial institutions do this by calculating your debt-service ratio.
To calculate your debt-service ratio, list all your loans (car, personal loans, monthly credit card balances) should not exceed approximately 40% of your gross income. The mortgage payment and taxes should not exceed approximately 30% of your gross income.
Interest Rates and Other Variables
The size of the mortgage you can arrange, based on payments you can afford, depends on interest rates. The lower the rates, the larger the possible mortgage and the more affordable housing is.
But there are other mortgage terms to consider, as well. How open is the mortgage? Is the mortgage portable?
Discuss your mortgage options with a REALTORS®, your banker or a financial advisor. Establish a limit – and stick to it.
REALTORS® have broad and current knowledge of the financing choices available to home buyers – and there are many of them, an often confusing array. At your request, a REALTOR® will assist in evaluating mortgage options and obtaining financing at the most attractive prevailing rates and terms.
A Skillful Negotiator
REALTORS® are experienced in arranging fair deals. He or she will assist in negotiating an offer, acting as a mediator to head off potential conflicts between you and the seller, and draw up a legally binding contact.
Buying a home can be an exasperating and time-consuming experience. But not if you enlist the services of a REALTOR®. A real estate professional understands the market, knows exactly what is available and can match your needs and budget to your new home efficiently and effectively.