The American Dream. While the dream has changed over the years, a majority of people still plan to own a home at some point in their life. Home buying can seem daunting and unachievable if you don’t understand all of the options available to you. Gone are the days of 20% interest, massive down payments and perfect credit scores. Interest rates may be on the rise but at a current rate under 5%, it’s still better than most credit cards and car loans. Down payments start around 3% and there are several programs that can help you move in for nothing down! Perfect credit score not needed. While a 620 score is ideal, some loan approvals happen with credit as low as 580.
When you look at the reality of what it takes to purchase a home, it’s hard to find an excuse not to do it. In the Seattle Metro area, it actually costs nearly the same to rent as it does to pay a mortgage. And while rents always go up (with no statistical data ever showing a down turn in rental prices), your mortgage stays relatively the same (property taxes and insurance being the only wild cards when fixed rate loans are utilized).
Buying may not be the perfect option right now but even when taking the last economic downturn and housing crash into account, real estate is still considered one of the safest ways to invest your money. Even people who may not be ready to settle into a forever home can build retirement nest eggs by turning their homes into rental properties. The first thing to do when trying to decide if you’re ready to purchase a home is to create a budget.
For years, I kept my head in the sand. Not wanting to admit the amount of money I was throwing away and refusing to analyze my financial decision making. Until my rent was increased for the 3rd straight year by over 10%. It seemed crazy that my access to housing could be torn out from underneath me as the owners decided to increase prices. If the trend continued, it was only a matter of time before I was forced into another uncertain rental situation. So, it was time to look at what I could actually afford.
Here are some great websites that can help you organize and analyze your budget.
Mint.com is a great tool. You can link it to all of your accounts to help track your spending habits automatically. You can look at past history and set goals based on areas you think you have room to improve. You can set limits and the app will actually alert you once you hit your set limits.
Level is a bit simpler. You put in your necessities and it can help determine your discretionary spending limits. You enter how much you have to spend on housing, utilities, savings, etc and it can help determine what you have left over. It’s a great way to pre-plan your spending habits
When deciding what you can spend on a mortgage, it’s important to remember a few key things. Mortgage calculators lie. Ok, maybe not lie but they do omit important information. People enter the housing marketing thinking they can afford one thing only to find they are $50k or more away when things like taxes and insurance are taken into consideration. The best way to determine what you can afford is by talking to a lender. So, step one is to look at all of your monthly expenses:
Entertainment (you don’t want to be house poor and sad)
Utilities (note that utilities are higher in a single family home than an apartment)
***Garbage, Water, Sewer, Electricity, Gas, Cable
Other Expenses (Daycare, School, Etc)
From there, figure out what you have remaining. Then, when you start working with a lender on your pre-approval, you will know exactly how much you have to spend each month. Share that with your lender and they will be able to tell you what price to stay under.
Some things to keep in mind when thinking about what you can afford:
Things break – either make sure that you have money in savings for emergencies or purchase a home warranty on your new home. Your agent can help refer you and some even offer to provide one on your behalf at closing.
Taxes change – property taxes go up and down based on voter approved increases and the valuation of your home. As property taxes increase, so will your monthly payment if your taxes are wrapped into the mortgage (which is typical).
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