Affording Your First Home Mortgage
How to afford a first time mortgage is a huge problem for many people starting out. A home of your own is one of those universal dreams that everyone strives for. However, these days, with home prices high, getting on the housing ladder is harder than ever.
Many people go out looking for their dream home and when they have found it, they then set about raising the finance - and often struggle.
This is absolutely the wrong way to start the home buying process. Once you have decided you want a home, you need to sit down and ask yourself some hard questions - and you should'nt even look at a house sideways until you have answered them completely and honestly.
Questions to Ask Before Looking for a Home
By the time you have answered all the above questions you will know what you can easily afford. One of the biggest mistakes made by first time buyers is stretching themselves beyond what they can easily afford. It is far better to live happily in a small house that you can easily afford than it is to live in a big house, overwhelmed by debt and bills and a SLAVE to debt. It is hard to really LIVE life when financial stress is consuming your spirit.
- Why do I NEED to buy a House / Home
- What kind of house do I NEED
- Is NOW a good time to buy
- What are my key requirements for the house - List them out
- How long do I intend to live there - Be realistic, consider any career plans
- What monthly payments can I afford ( use Income & Expenditure Calculator )
- What down payment can I raise
- What mortgage can I afford ( use - Mortgage Calculator )
- What is my Home Purchase budget
- What are the house prices for the type of house I am looking for.
- Are there any other areas I would consider living in
Getting The Mortgage Down Payment
Most mortgage companies require expect a down payment of at least 10%, to get the best deals or for easier qualifying, you may need to go as high as 20%. Deals are available for 0% if you have great credit, but generally the lower the down payment the worse the terms of the mortgage. For many the down payment is a show-stopper. But it need not be! A real desire to get a grip on your finances can make it happen. Sometimes waiting and saving just that little longer may be the right move. Here are some ideas to help raise your mortgage downpayment.
REALITY CHECK! - If you are unable to raise a 10% deposit and can see no way of saving for it within a couple of years, you are probably stretching yourself beyond where you should go. You should consider a lower cost home if possible or re-examine your finances to see if things can be improved.
- Save - This is the most straightforward option. Simply getting to grips with your financial affairs and really focusing on your incomes and expenditures can allow for very rapid savings for the determined.
- Use IRA Funds - First Time buyers are allowed to use up to $10,000 their your IRA funds without incurring any penalties, if you are purchasing with a partner, they can do the same, increasing the downpayment to $20,000. Your withdrawn funds will be taxable.
- Borrow from your 401(k) - This is an option but the downside is it must be repaid with after-tax dollars, on the upside your interest payments will be going back into your 401(k).
- Downsize - Look for a smaller, cheaper home. This will reduce the size of the required downpayment AND monthly payments.
- Ask a Relative - Getting started is tough, your relatives who love and care about you know this and may be prepared to help. Gifts of several thousand dollars can be made without tax consequences to either the giver or the receiver. The gift-exclusion amount is adjusted for inflation annually and is currently $12,000.
- Increase Income - Get a second job, ask for a raise - Put all the income towards saving a down payment
- Sell Assets - Sell unwanted assets, sell your junk. Sites like eBay have made it very simple to turn your unwanted goods into someone else's bargain and cash towards your down payment.
What Size Mortgage Can I Afford
Here are the basic on how your lender will assess how much mortgage you can afford. You can also play around with our Mortgage Principle Calculator to work out what you can afford.
Assuming an annual income of $50,000.
Your maximum monthly mortgage payment would be 28% of your gross income divided by 12 - $1166.67.
The total amount of debt payments lenders are happy for you to carry is 36% of gross income - $1500.
The amount of additional debt you can carry before it impacts how much you can borrow - $333.33
Assume a 30yr mortgage at 7.0% - monthly repayment = $1166
Obviously if you place a larger down payment you can afford a bigger home but there are a number of other factors such as credit history that may influence the amount and final terms of what you are offerred.
Remember - and this is important - Just because your lender says you can afford X amount of mortgage, does not mean that you should. Do your own homework and know you own financial capabilities. Lenders want to lend you as much as they can and are not concerned with your financial well-being, so take their advice with pinch of salt.
Affording The Monthly Mortgage Payments
Choosing the Right Mortgage
Affording Your First Home Mortgage
One of the biggest problems faced by younger people today is
how to afford that first home. When I first set out, I had nothing and I faced
very similar problems. I sought out a house in a poor but habitable condition with
plenty of rooms in a good but unfashionable part of town. I scraped together a
deposit and persuaded the bank to lend me the balance based on a projected
cash-flow that allowed for some renovation and taking in several lodgers. The
scheme worked and I was on the property ladder. As an aside, that was one of the
happiest times of my life, I got to choose my housemates and we had a wonderful
few years together and they remain life-long friends.
With mortgages the key consideration is affordability with of course
favourable terms. It is vital that you know you can afford your monthly
payments not just now, but also if interest rates were to increase by several points.
People so often push for the very maximum they can afford and leave themselves
vulnerable to financial misery should interest rates increase.
Whilst it is true that the longer the period of a loan, the more the loan
will cost overall, it is a simple fact that most people redeem their mortgage
far earlier than this when they sell their property and move up the property
ladder. For this reason I strongly recommend trying to get an interest-only
mortgage (without the requirement for an endowment), if you are able to obtain
this. Otherwise go for the longest loan period available. In all cases it is
essential that there are no early-redemption charges and that you can part repay
the loan without penalty. The recent development of flexible mortgages where the
outstanding amount can be reduced or re-borrowed within a set sum is ideal.
The kind of mortgages available and the legal framework around them vary from
country to country but the underlying principle here is to maximise what you can
easily afford by minimising the costs associated with a mortgage. In particular
reducing the repayment element as far as possible.
Avoid short term offers, these usually have a sting in the tail. Go for a
good variable rate with a reputable company. Continually changing mortgage
companies to maximise on short term benefits comes at the cost of substantially
increased financial complexity and management. Some financial gains may be made
but chances are they will be small and not worth the hassle.
Only select mortgages where interest is calculated daily or at worst monthly.