If you’re currently renting an apartment or even a home, then you are aware of the steep costs associated with renting. According to recent studies, Americans spend 30% of their monthly income on rent, while those who live in their own homes spend only 15% on mortgages. Now obviously all of us would prefer to own homes, but one of the biggest road blocks is the down payment. For most of us it’s difficult to know when you’re in a suitable situation to take on such an expense. So timing is everything when it comes to making move like this. Let’s break down what mortgage experts think about the whole issue of switching from a renter to a homeowner. So you’ll be prepared if you find yourself having to make such a transition.
Knowing whether you are ready or not
First let’s go over liquidity, meaning the amount of money you have at your disposal. Generally, those who have fewer debts than others are considered liquid enough to afford a down payment. For example, your car is paid off or nearly so, if you have student related expenses those are taken care of. Essentially a significant portion of your finances are not being budgeted to various debts you may owe. Your financial position should tell you whether you are ready to make that move or not.
The difference between being ready and thinking that you’re ready
You have been looking forward to a place you could call yours for ages now. So It’s understandable that the decision to buy a home is at times nagging at you. Some buyers find themselves making instinctive decisions, only to find that they were never ready to make the move when they did. There are many financial commitments that come with owning a house, and it is important that you keep them in mind when making your final purchase decisions. Home inspections($300-$400) will be required, there are hidden costs such as an appraisal, and title and escrow fees(approximately $700-$5000) you might not be aware of, and the financial responsibility of taking care if a home needs dedication. You therefore need to be very sure about what you want before diving in.
It may not make sense if you move a lot?
Some of us move around a lot, so it doesn’t make sense, financially speaking, to buy a home in one area, only to move to another city or part of the country within the year. In addition, the costs of purchasing your home may not be recovered in such a short time.When you sell your home there will be fees required so the house needs to have some equity so that it makes financial sense to sell. So take into consideration where you want to buy your home and how this will impact you. Keep yourself flexible if you do need to move it may make more sense to rent out your home for a short term.
How much of your monthly income should you pledge towards mortgage repayment?
According to experts, if your mortgage costs 30% or a little less of your monthly income, then that is a feasible rate. You want to live comfortably and enjoy the trimmings of modern living without having to sacrifice too much to your mortgage payment. Think about the percentage you would be comfortable paying as part of the mortgage. The industry has no set percentages, and some lenders are flexible enough to allow you to pay out what is within your comfort zone. Here’s where it helps to have a very well rounded understanding of your general monthly expenditures.
Homes with down payments of less than 20%
Most 1st time homebuyers come to the table with less than 20% down. This is definitely acceptable and occurs quite often, but keep in mind that coming in with less than 20% will mean that you will get hit with a higher house payment. The reason for this is the dreaded “PMI” private mortgage insurance. This insurance can add approximately $200-$300 dollars to your monthly payment. You can actually obtain an FHA loan for as little as 3.5% of the purchase price as your down payment. However, the interest rate from an FHA loan will be lower than the interest rate from a conventional 20% down loan but not enough to offset the PMI fees. This is one of the reasons many homebuyers make plans to refinance their homes as soon as the home increases in value enough to eliminate the PMI fee. Your lender will give you more details if needed.
To rent or to buy: where is the financial edge?
Again it all really depends on where your finances are at this particular point in time. It makes sense to rent if you think that the down payment on a new home is going to be exacting. And it makes perfect sense to look around for a home when you are sure you can make the sacrifice without veering too far away from your comfort zone.
Leveraging on your savings
The beauty with savings is that they give you a lot of flexibility in life. If you save more, then you are in a position to buy more. At the same time, putting up more money upfront ensures that you enjoy less installments like PMI and preferable rates in the long-term.
Moving from renting a home to owning one is a big decision and I’m unsure if I made it any easier for you. Just remember to find a mortgage professional and pick their brains about your ability to make such a transition. I have a list of 7 lenders that I trust. Call me and I can send it to you if you don’t know who to call. They will check your credit score and let you know what they need in order to get you going in the home purchasing direction. Be wary of any additional costs associated with home ownership. And do not forget to lean on the expertise of a great real estate agent to point you in the right direction.(such as Gabe the House Guy *hint…. *hint….)
Powered by WPeMatico