Knowing your Budget for Buying a Home
Buying a home can be a very scary venture. This is going to probably be your biggest purchase ever and you want to be sure and do the right thing. Let me assure you it is a great decision as long as you follow a few proven tips and budget properly. There is nothing worse than living in a house you hate to come home to because you really can't afford it. I say house because it turns from a home to a house the moment it starts to drain your pocketbook and become a burden. Hopefully in reading this you will be able to purchase a home feeling more confident and comfortable.
The best way to find out how expensive a house you can afford is to start with a little simple math. Take your gross annual income after taxes and divide it by twelve. This will be your starting point because you know we can't get away from taxes. Next add all your bills that you pay each month… credit cards, car payments, gym memberships, etc. Most banks and lending institutions don't want you to go over 35% of your monthly income after taxes. Next, you need to multiply .35 by your monthly income and subtract the amount that you pay each month for your bills. The rest is what is available to pay your house payment (mortgage). Now this only gives you a general idea of what you can reasonably afford and a great place to start.
Example… Gross annual income $40,000 divided by 12= 3333.33
Car payment $ 325.00
Gym membership $ 75.00
Credit Card $ 30.00
$ 430.00
3.333 X .35 = $ 1,000.00
- $ 430.00
$ 570.00 (Available for your monthly mortgage payment)
The bigger your down payment, the less you will have to finance and the banks like this better because there isn't as big a risk to loan you the money. Their loan is more secure and you will probably get a better interest rate on the loan.
Other costs to consider when purchasing a home are the closing costs and the points or a percentage of the loan. This is how the bank makes its money. These costs vary between lenders and so it is advisable that you check on the internet and talk with different lending institutions before buying. It is a good idea to ask your lending institution to explain in detail what the points are charged for and how they affect your loan. Do not forget you can always negotiate.