The responsibility of owning a home for the first time can be a little frightening, but also very exciting. It’s a step toward feeling secure, but only if the loan taken out on the home is one which is affordable, given that home ownership also brings with it many other costs. What new first-time homeowners or home-seekers often don’t take into account is what they can actually afford, given that utility bills and other expenses will increase the amount of outgoings they can expect to pay. Having never owned a house before, many of these are a mystery. The savvy purchaser will be one who investigates the running costs of a home, and who then bases his assumption that he can afford the mortgage upon realistic facts concerning the upkeep of that home.
•How much can you afford?
This really does need calculating. There are websites which give you the opportunity to fill out a questionnaire with your details to establish how much you can afford. These are based on the income that you have, the cash payment you can put down on a house as a deposit, the current interest rates for mortgages and your monthly outgoings. The problem here is that you will have to substantiate your monthly outgoings with many lenders, and it’s not worth trying to cheat by implying that you owe less than you do. Credit card payments, car payments and other loans will be taken into account when you calculate how much you can afford to borrow. As an example, with an annual income of 40,000 and a down-payment of 10,000, the amount needed to be borrowed will be the difference between that 10,000 and the price of the home. It isn’t as clear cut as that though because you also need to calculate what you need in order to pay lawyers and real estate agent fees as these add to the burden of buying a home and should be added in to what you need to borrow. This calculator will give you a rough idea of what you can afford to borrow based on your own individual criteria.
•How the calculations work
The calculations will be based on the length of the mortgage requested. Obviously, the longer the mortgage period, the less the monthly payments, but beware. You will pay charges upon what you borrow based on an annual percentage which is set at the time that you borrow. Find out if this is a flexible mortgage or whether that percentage is stable for the whole period of the mortgage. There are different types of mortgage and you should check them with potential lenders. The US Bank allows you to use another tool to gauge what the monthly payments will be based on different criteria so you can get a rough idea of the period you want the mortgage to run, and what you can expect to pay each month of that mortgage. A $100,000 loan over a 15 year period for example, at 6.25% would cost you $857.42 per month. However, lengthen the period of the mortgage to 30 years and you knock over $200 off the payments per month.
So what’s in it for the bank?
Banks are not charitable organizations. They make their money on the interest you pay over the period of your mortgage. The price of the property secures your loan, and thus the bank will not lend you more than the home is worth in the current market. There is a difference between what the vendor is asking and the value that the bank put on the property. They will have a surveyor check the value of the home and base their decision as to how much you can borrow based on the value of the house and indeed what they could reasonably expect to get back if they repossessed the home in the event of you missing payments.
The reality is that you will pay a lot more back than you borrowed. For the two examples given above, for example, the total payments made to the bank over a 30 year mortgage for $100,000 at 6.25% would be approximately $221,656, and thus the bank will have made an enormous profit on what you borrowed. If you borrow over a shorter period of time, the amount they earn from you is less.
Additional costs you may not be aware of
Some banks charge you a one off fee to set up a mortgage. This covers the administration of the loan. Do ask what this will cost as it may be more than you anticipated. There may also be a clause within the mortgage agreement that requires you to have house insurance and loan insurance. The bank want to protect its investment, and charges for these will be annual. If the house burns down, for example, the bank want to know that you have the risk adequately covered, and in the event of you being unable to pay the loan because of circumstances such as death, then they also want to know that an insurance company will honor the amount which is left outstanding.
So how do you choose which lender?
A bank that you trust and that you have had dealings with would be able to talk you through the basics, though you are not obligated to lend from them. The fact that they know your financial status may help you in securing a loan at reasonable levels. However, do check other lenders to see what they have on offer.
Adjustable mortgage rates
These are more advantageous initially, but be sure that you realize that the rates can fluctuate. A calculator for this type of mortgage can be found here. If you opt for an adjustable mortgage, talk over what this means in reality before being too quick to make your decision.
First time buyer incentives
It’s worth checking to see what your state offers as incentives for first time buyers. These incentives allow first time purchasers to buy with less of a down payment being needed. Before agreeing to a mortgage do check this web page, because it shows, state by state, what first time buyer incentives may be available to you, and these may be important. Often schemes cater for people with limited income, and put money aside for first time buyers. The rates that you are offered for a mortgage may be advantageous and it’s certainly worth following through before signing anything at all.
Other things that affect loans and what they cost
If your deposit is higher, then of course you will need to borrow less. It’s worth seeing how much you can put into the property without stretching yourself to limits. On a first home, for example, there may be necessary repairs to make the home habitable. Keep enough in the kitty to make sure that you can live in that home. You can always buy luxuries at a later date when your salary allows it. The bricks and mortar are important, and as this is your first home, the types of things you should bear in mind are the state of the home being purchased and the work you can’t possibly do on your own. In the case of electrical, plumbing or roofing repairs, do get estimates of what the repairs will cost and try and use this for bargaining when you make an offer on the home in question.
The less you pay for the home, the less the mortgage will cost and the easier things will be, but if you are able to make a larger down-payment then of course you cut your monthly outgoings because your loan will be less.
When buying your first home, do take the advice of experts if you are unsure of anything at all. Don’t sign things in a hurry and read the documentation signed for the loan. See if there is a penalty for paying early. Often there is because the bank know they will lose money long term if you decide to shorten the term of the mortgage. Being aware of all the details of what loans are available puts you in a stronger position. Your credit history will need to be good, and you will be asked to provide details of your financial situation. All of this is normal when applying for a loan, and as this is probably the largest loan you have ever taken out, it’s also a serious matter to be understood completely before signing on the dotted line.
If you do your homework, and find the right house at the right price, and a bank willing to explain the intricacies of mortgages to you, as well as checking to see what incentives are offered in your state for first time purchasers, you will be on the road to the responsibility of home ownership. When you pick up those keys, there will be a sense of achievement, as you take that first step onto the property ladder that provides you and your family with the security of owning their own home.