Buying a Home – Determining affordability

Buying a home is the most expensive decision/investment you’ll ever make in your lifetime, so make sure you do your homework! Earlier this year, I was able to purchase my first home. The experience for me was pretty emotional and stressful with a combination of excitement, anxiety, fear and joy all in one. There will be tons of information that you will have to absorb in order to make wise house buying decisions, from deciding if owning is really for you to fully understanding the in’s and out’s of home mortgages.

In this post, I won’t be concentrating too much on the actual details of a home mortgage, instead I want to focus on the process that I went through for purchasing my home.

From an abstract point of view, here are the things that I considered to be very important when purchasing my home:

1.) Determining affordability

2.) Finding a good home mortgage program

3.) House hunting

An important thing to note, when I had decided to purchase a home, I knew that I would stay for long term(meaning at least 8-10 years) The thing is, if you can’t commit to remaining in one place for at least a few years then you might want to reconsider owning a house. With all the different costs and fees of buying a home you’ll probably end up losing a lot of money, especially in my case where I bought points to lower my interest rate.

Let me break down my 3 points.

Determining affordability. The earlier you’re able to determine your home purchasing power the better. It is very important to establish what range and bounds you should be working in and also to pre-calculate your expenses. You don’t want to end up in a situation where your house payment is so high that you can’t afford to get anything else.

The general rule of thumb  is to buy a house that roughly costs two and a half times your income. For example, if your income is $100,000/year, then you want to get a house that’s around or under $250,000. Now this amount seem reasonable to you? We can go deeper and found out. Lets assume that your interest rate is 4.5% with a 30 year mortgage. Using a mortgage calculator, a mortgage for $250,000 would come to $1266 each month. Can you afford this? There’s more, lets move on…

Next, you also want to determine expenses like taxes and home insurance. Assuming you have a general idea of the location where you’d like to live, you can find out how much that county/city tax is by calling your their local treasurer office. Also, don’t forget about state tax. It’s usually around ~1% of your home value for county/city and much lower for state. In my area, I have to pay for both county and city and state tax which comes to .94%, .65% and .11%, respectively. That’s a total of 1.7% in taxes that I pay on my home, that’s alot of money so its good to be able to know this upfront before  making any decisions. If you lived in my county, and taking the $250,000 value from my last example, then you would pay ~$354 each month for taxes. Now that’s $1266+$354= $1620  each month. How about now, can you afford this? Okay, we’re not quite done yet there’s more, lets move …

Now lets talk about insurance. There’s so many types of insurances out there but I just want to talk about the two major ones. Private Mortgage Insurance(PMI) and Home owners insurance. According to wiki, typical PMI rates are $55/month per $100,000 financed. So lets continue on with the example and you owe a total of $250,000 on your mortgage. That’s $55 x 2.5, which comes to a total of $138. Now a quick note, PMI is only required if you do not own 20% equity on the home, in other words, if you put down 20% for downpayment then this does not apply to you. In my case, I do not have PMI but it’s not because I put down 20%, I’ll explain what I did to avoid this when I go into my 2nd point(Finding a good mortgage program). Home owners insurance varies from company to company and also depends on what’s in your home(fire alarm, home security systems, home value..etc), so in this case I’ll just estimate. Usually for a home that’s valued at $250,000 the home owners insurance will be ~$40. Now lets add what we have here… $1620+ $138 + $40 = $1798.  Now, can you afford this?

So early last year, I calculated how much I could afford(based on the steps I just went through) and I kept plugging in new numbers with different location tax prices to determine how much I can afford. I repeated these steps until I reached a number that  I was comfortable with and then continued on to step two which I’ll talk about in my next post.

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  1. Yes, I agree with you that buying a home is the most expensive and tough decision to make in the life time.
    Its not the matters of some appliances which we can change it in a year if we dont like it.But its a serious matter because once bought you will spend your entire life or atleast 10 years of it .So it has to be a tough decision.

  2. Everybody dream of their own home.And most of people invest most o their earnings for this purpose.I will certainly consider these valuable ideas. Determining affordability,
    Finding a good home mortgage program,
    House hunting.Hope that these ideas will help me a lot in this regard.

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