How Much Home Can I Afford?
Before you go out looking for a home, it's good to get an idea of what you can afford. One quick way is to try our affordability calculator. This handy tool will help you estimate how much mortgage you can handle before you start looking for a home.
Another thing to consider is your down payment amount. Think you can't buy a house without a 10% or 20% down payment? Thanks to more lenient government guidelines and new mortgage products, many people can now get into a house for as little as 3% down –– or less. There are even some special programs for first-time buyers that help with closing costs.
Financing
The amount of money a lender will loan you depends primarily on how much you can afford for the monthly payment, and how much you can invest in the down payment.
Monthly payments consist of the principal and interest on the mortgage loan, as well as property taxes and homeowner's insurance. These four costs are often abbreviated as PITI.
The larger the down payment, the less you need to borrow, which means a lower monthly payment. The obvious source of money for your down payment is either your savings or the proceeds from the sale of a home you already own. There are, however, special financing programs available that you should also consider.
Pre-Qualification vs. Pre-Approval
Pre-qualification is just a rough estimate of how much you could afford. But with a pre-approval, it's just that: getting your mortgage approved prior to going out and looking for a new home. It's a good idea to get pre-approved before you start searching for your home. An offer to purchase presented by a pre-approved buyer stands a better chance of being accepted if there are multiple offers on a property.
Your loan officer will show you which items you should bring to apply so neither of you will need to wait for various written income, asset and liability information. So you could get a loan decision in just days. And with a Chancellor HomeServices Lending loan officer you can get your approval quickly!
The Benefits of Equity
Equity is the difference between what your home is worth and what you still owe on it. When you sell your home this equity can be used as a down payment on a new home. If you don't sell, this same equity can be used as collateral for a home equity loan. You can use a home equity loan to finance home improvements, a child's college tuition, or a new car.
Real estate is also a great way to keep a hedge against inflation. While some homes do appreciate in value more quickly than others, real estate usually keeps pace with inflation. In fact, homes in general have been appreciating at a steady 3% a year. (Your real estate agent can provide you with the housing appreciation rates in the areas in which you're interested in buying.)
That Wonderful Thing Called A Tax Break
As a homeowner, when filing your taxes you can deduct the interest portion of your monthly payment –– and that can mean big savings. You can deduct your property taxes, too.
So look at what your monthly mortgage payment will actually be, taking your tax breaks into consideration. You may find out it's about the same as –– or sometimes even less than –– a rent payment!
With a 5% down payment, a $100,000 30-year mortgage loan at 8% interest (8.15% APR) requires a monthly principal and interest payment of $733.76. Assuming a 28% tax bracket and $150 for monthly property taxes, the after-tax monthly payment would be about $615! (This is only an example. Please consult a tax advisor regarding your own tax situation and current tax laws.)
