Owning a home is one of the most common goals our clients have. We all remember dreaming about our perfect home as kids. Our clients are now asking us, "How can we make this dream a reality?" The lesson we want to share with you is this: don’t overpay for your dream home—learn how much you can afford! In our blog, we will provide a step-by-step guide to help you determine how much home you can afford.
Spoiler: It’s likely less than your banker, broker, and realtor recommend!
Now is the time to browse real estate apps to explore homes in areas you love. This will give you a sense of what home prices are like. Consider the style of homes you're interested in and note what they have in common, as well as their average price range.
Once you’ve narrowed down your price range—let’s say around $500,000—you can start comparing homes that are $50,000–$100,000 above and below that figure. This will help you establish both your high-end and low-end budgets.
Now that you have a price range in mind, let’s take a closer look at the key factors that influence your mortgage payment. Understanding these will help you make an informed decision when purchasing your home.
Interest Rates
Interest rates fluctuate over time, so it’s important to stay updated. We recommend monitoring current rates throughout your home-buying process. A great resource is the FreddieMac website, which provides real-time updates on 30-year and 15-year mortgage rates.
Property Taxes and Homeowners Insurance
Your monthly mortgage payment typically consists of principal, interest, and escrow. The escrow portion covers your property taxes and homeowners insurance. To get an estimate of your property taxes, you can use an online property tax calculator that takes into account your county and home value. For homeowners insurance, the annual premium is generally between 0.5% and 0.6% of the home’s value.
Down Payment
Review the cash you have available for a down payment and make sure you will have cash in your savings account (at a minimum of $10k, but most of our clients need much more than this), even after closing. This will help you cover any unexpected costs that come with homeownership.
If you have investments in a taxable brokerage account, consider whether it might make sense to use some of those funds for your down payment. However, using investments for this purpose can have tax implications, so we recommend consulting a financial expert (like us!) before making any decisions.
If your down payment is less than 20% of the home’s price, you'll need to pay for private mortgage insurance (PMI). PMI is added to your monthly mortgage payment until your loan-to-value ratio reaches 78% of the original home price, or until halfway through your loan term, whichever comes first. PMI typically costs between 0.5% and 1.5% of your loan amount per year, depending on various factors.
With a clear understanding of the key factors above, it’s time to crunch the numbers and see what might be realistic for you. We recommend using a mortgage calculator to input your prospective home’s value, down payment (don’t forget to include PMI if your down payment is under 20%), interest rate, property tax, and homeowner’s insurance.
Hitting calculate isn’t the end! At Fyooz Financial Planning, we emphasize the importance of cash flow in making sure your financial decisions align with your day-to-day life. We run multiple scenarios with different home prices and down payments to find a solution that works best for you.
We find that a lot of first-time home buyers see a significant increase in their housing payment. For example, we have clients who are used to paying $3,000/month on rent, and the home they are looking to purchase will have a $5,500 mortgage payment. Not only that, we are aware that they are expecting their first child later in the year. The inevitable ~$2,000/month daycare expense is also on the horizon for them. Our conversations help the couple map out cash flow changes over the next 1-2 years so they can confidently go into this home purchase without making regretful financial decisions.
If you find yourself needing expert advice, feel free to schedule a free consultation with us. We’ll help you find a path to reach your financial goals!
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
