April 28, 2021
When it comes to home buying, there used to be an old saying. “Don't be house-rich but cash-poor.” The goal is to not create a situation where you are inadvertently creating a financial hardship – even if things look good on paper and a lender will loan you the money.
Buyers need to have cash on hand for closing costs which can amount to between 2% and 5% of the purchase price, depending on which state you live in. Additionally, the more down payment you can make, the less interest you'll pay over the life of the loan, and the smaller your monthly mortgage payment will be.
If your down payment is less than 20% of the purchase price, you will likely incur the extra expense of PMI insurance. Paying PMI usually results in a monthly mortgage payment going up anywhere from 0.5% to 1% of the loan amount. How much you pay in PMI will depend on the size of the home, your credit score and home appreciation potential.
While budgeting for homeownership, in addition to your monthly mortgage payment, make sure to factor in your other monthly or potential expenses. These include insurance, utility bills, repair and maintenance costs, and any credit card payments to help determine how much you can afford. Of course, what’s "affordable" will vary with each individual so you need to have a firm handle on your finances.
To help you do that, an effective method of calculating your homebuying budget is called the “28% Rule.” This rule means that your mortgage should not be more than 28% of your gross income each month, and no more than 36% of your income should be debt.
Perform these upfront calculations and help avoid financial trouble down the road. This will help ensure that your dream purchase is one that you will always enjoy and never regret.
Bottom line? Don’t buy more house than you can realistically afford. Use our mortgage calculators to nail down your budget and get into your home today.