Home Financing 101: Making Sense of Dollars and Cents

You have to take a lot of things into consideration when choosing a new home like: is it in the right neighborhood, the right school district; is the house large enough or too large; will it still suit your family in five and ten years; does it have an adequate backyard; is it pet friendly; and, perhaps most importantly, can you afford it?

Cost is one of the biggest deciding factors in purchasing a new house, and while there are mortgages available, you have to be cautious when obtaining one. You have to get one that will not only enable you to buy the property but also keep you within budget. Therefore, you must approach obtaining a loan with an understanding of what you can and cannot afford to do.

The first step is determining how much you can spend. Your monthly housing costs from insurance to interest to principal should be no more than 28 percent of your income. So, multiply your net income by 28 percent and you’ll get the number you’re looking for. However, if you already have some outstanding loans, keep in mind that you don’t want them and your mortgage to be any more than 36 percent of your income. Make adjustments to what you think you can spend if necessary once you’ve accounted for other loans.

Once you determine how much you can spend, find out how much you can get with pre-approval. This entails going to a lender and obtaining a letter stating the maximum amount you can expect from a loan. With this document in hand, you’ll have a better bargaining chip for the house you’re bidding on and you won’t make any promises you can’t keep as you’ll know your limits.

Of course these limits may flex a little bit when you take into consideration the tax laws in your area. Mortgage interest, property taxes and loan fees are tax deductible. Once you’ve paid any or all of them you can deduct them from the taxes or that period. This will provide you with a small discount on your mortgage and possibly give you a little more leeway in where you buy your home.

If you want to come out even farther ahead financially, look for a lender who does not charge closing fees. This will keep the cost of your closing down, to the down payment and the beginning escrow accounts for taxes and insurance. But be careful in taking this step, as some limitations may apply, and if they are too confining, you won’t leave the deal with any benefit at all. And remember, even if you do find a lender with no closing costs, you may want to pay one or two points on your mortgage at the closing, regardless. This will help you obtain better interest rates, which in the long run will save you money.

Figuring out how to finance a new home is tough and can be a nail biting process, but if you go into it with eyes wide open, ready for change and unexpected surprises, you’ll be able to get through it and remain within your budge, which is really the only way to live.