Financing Your Dream

What you want and what you can afford may be two different types of houses. Don’t set yourself up for disappointment!
Determining your budget before you look at the first house is critical to ensuring an enjoyable home-buying experience.
Here are some factors to consider.

Why buy?

Housing markets can get turbulent as values rise and fall, but owning a home in a desirable market like Montclair and its surrounding towns is a strong investment over the long term.

Tax benefits

The U.S. tax codes are set up to encourage homeownership. Unlike the sunk costs of rent payments, mortgage and home-equity interest is tax-deductible, and the sale of your home is usually exempt from capital gains taxes. These tax savings can translate into thousands of dollars in savings every year.

What does “affordable” mean?

Most lenders consider a house to be affordable if the combined mortgage, property tax and homeowner’s insurance payments amount to 28 percent or less of a household’s gross income. But that’s just your starting point. Don’t forget to figure in additional outlays for utilities, maintenance, commuting and other regular costs associated with owning your home.

Cash on the table

Several conventional mortgage programs require a minimum down payment of 20 percent of the purchase price. Cheaper options exist, such as FHA and VA mortgages that require just 3.5 to 5 percent down, but they require private mortgage insurance (PMI) and will increase your monthly payment. In addition to these up-front costs, you can also expect to spend 4-8 percent on closing costs and moving expenses.

Mortgage interest rates

Buying while interest rates are low can dramatically impact how much house you can afford. Let’s say a buyer can afford the payments on a $500,000 mortgage at 4.375 percent after paying 20 percent down on a $625,000 home. If rates sink to 3.675 percent, however, that same buyer can afford a $548,000 mortgage after a 20-percent down payment on a $685,000 home. That’s $60,000 in additional buying power for the same monthly payment.

What’s your comfort level?

While general rules of thumb are useful as guideposts, you’ve got to consider your own lifestyle and financial situation. Other expenses such as student loans, children’s daycare or elder caregiving should figure into the equation. And if you want to upgrade your home with renovations or purchase new furnishings and décor, those costs should be also be calculated before you submit a contract.

The importance of pre-approval

After considering the above factors, it’s time to seek pre-approval on your mortgage – the final and most important step in accurately determining what you can spend. Knowing how you qualify before submitting your mortgage application will eliminate anxiety from the home-search process, and it will give sellers the confidence that you’re a serious buyer.