How Much House?
House hunting begins at home—with planning. The first step toward buying a house is to sit down. Before you grab the road maps and hit the streets, you need to do a little planning. We call it “pre-qualifying”. Simply, it’s determining how much house you can afford to buy. Knowing your affordable price range will bring your house-hunting into focus. Many lenders will send out all required verification and pre-approve you for a mortgage, allowing you the opportunity to negotiate as a cash buyer.
How much house you can afford to buy depends on two things: how much you can afford for the monthly housing payment, and how much you can invest in the down payment. Monthly payments include principal and interest on the mortgage loan, and property taxes and insurance against fire and other hazards. These four costs are often abbreviated “P.I.T.I.”. For some buyers and lenders, monthly housing costs may also include homeowners association dues, condominium fees, and mortgage insurance.
How Much House Can I Afford?
The key items are the size of the down payment, interest rate, any monthly property fees, and the amount of the mortgage. The down payment might be zero in the case of VA-backed mortgages. A down payment of 20% or more on a conventional loan will eliminate the need for mortgage insurance. I can be very helpful to you in determining just how much house you can afford.
Sources For Your Down Payment
The obvious source of money for your down payment is either your savings or the proceeds from the sale of a home you already own. But there are some other not so obvious sources. In recent years, for example “parent power” has taken some new twists for first-time buyers.
Home Equity Loan. Parents often have considerable equity built up in their own homes—and many are tapping that asset through home equity loans to make a gift to their children. Ask your tax advisor for current information. Often lenders will require a “gift letter” to verify that parents don’t expect repayment.
Life Insurance. If you have built up a cash value on your life insurance policy over the years, you may be able to borrow from your insurance company up to the amount of this accumulated cash value. Often, they will even ask a more favorable interest rate than would be asked for other types of loans.
Stocks and Bonds. If you feel the market doesn’t favor selling your stocks or bonds now, you may be able to secure a bank loan using your portfolio as security.
Company Profit Sharing or Savings Plan. Look into the possibility of withdrawing what you have in your profit sharing or savings plan account or borrowing against it, if your company has these programs.
Mortgage Insurance Can Reduce Down Payment
If you obtain a conventional loan, you may make a down payment of 20% or less. Through the lender, you will be required to buy private mortgage insurance (PMI). This insurance provides protection for the lender in case of default, allowing the lender to approve a larger loan amount.
Mortgage insurance offers a variety of payment options. You may make an initial payment at closing and monthly payments with the house payment. You may make only an initial payment or only monthly payments. You may even increase your interest rate and have the lender pay the insurance. Be sure to ask your lender for a comparison of the benefits of each of these plans.
One Caution
The larger the down payment, the less money you need to borrow. This means a lower monthly payment. However, remember that in addition to your down payment and monthly payments, you will need money to pay for closing costs, moving, appliances, household setup, a reserve for family emergencies, and other miscellaneous items. So don’t plan to put your last penny down on the closing table.
