At the start of the new year, and many soon-to-be first-time home buyers are gearing up for the big home search. The first question many of these buyers often want to know is: How much can I afford?
That all depends on several variables. The first few considerations include how much cash is paid up-front, the transaction cost, and how much the buyer can afford as a monthly mortgage payment.
Buyers must consider and calculate the potential costs of each. The cash needed to complete a real estate transaction includes the down payment and the closing costs. The best way to get a grasp of this cost is to speak with a lender, ask for a “good faith estimate,” and then get a pre-approval letter based on that estimate. As a general rule, figuring the down payment is relatively easy, but it all depends on the type of loan you choose. Conventional loans require a minimum down payment of 5 to 10 percent of the sales price, while other government-insured loans require less, such as a Veterans Affairs (VA) loan with no down payment and Federal Housing Authority (FHA) loans with 3.5 percent down payments. Please note that loans with less than 20 percent down usually include additional fees and/or monthly premiums. Consult a lender for details.
To estimate a mortgage payment, you need to figure out a minimum of three monthly costs, but sometimes as many as five.
First, calculate the principal and interest payment (P&I) to the mortgage company. You can use the calculator to the right to assess that fee based on the current interest rate. To determine a potential interest rate, look at the chart to the right that includes today’s estimated average rate. Remember, your lender will determine rates based on your personal credit standing and other issues. Enter your mortgage amount and the interest rate to get the principal and interest figure.
Next, determine the annual taxes on a potential property, and for that you can check tax records online or look at the listing if the house is listed with a real estate agent.
Finally, estimate insurance, which depends on a host of factors related to the property size and amount insured. Monthly cost can range from $50 to more than $100.
Another possible cost is private mortgage insurance (PMI), which again depends on the loan. If your down payment is 20 percent or more, mortgage insurance is typically not required. You may also have a condo fee or home owners association to pay monthly as well.
Add these numbers together:
P&I + Taxes + Insurance + PMI + Condo/HOA Fee = Monthly Payment
Voilà, you have your monthly payment!
The following is advice and information on financing. It is provided as an overview only to familiarize buyers with concepts and does not constitute professional lending advice that can only be rendered by a licensed lending institution. Please check with your lender for specific information relevant to your situation.
