Tag Archives: finance

How Much House Can You Really Afford?

Just because a lender approves you for a mortgage doesn’t mean you can comfortably afford it.

If you ask Google “how much house can I afford,” you’ll find a number of online tools and mortgage calculators to help you find a fast answer. You might also find quick but somewhat confusing advice like “your mortgage payment shouldn’t take up more than 35% of your monthly income.”

Quick. Do you know what 35% of your monthly income is? If not, you’re not alone. While online housing tools are a helpful starting point for the early stages of your house hunt, it’s important that you understand how the pieces all fit together, and that you take your personal financial situation into account.

Why a calculator can’t tell you how much house you can afford

  1. 1. Financial rules of thumb may not apply to you

    While 35% seems like a straightforward figure, your financial picture is a lot more complicated than that number would make things seem. Your ideal monthly housing costs could vary depending on things such as debt and other monthly payment obligations — not to mention how much you’ve saved for a down payment.

    If you have high credit scores and a clean financial background, a mortgage calculator can be a great starting point for mortgage shopping. You’ll get a much better sense of what your price range might be instead of a blanket rule of thumb. But they’re only as accurate as the information you provide, so if you forget to add regular budget line items such as food, day care, or gas costs, you won’t get a complete picture.

  2. 2. Your lender may approve you for more than you can realistically afford

    Lenders are now legally required to ensure borrowers can “reasonably afford” to repay a loan before they approve a new mortgage. But there’s a difference between being able to reasonably afford something and being able to realistically afford something.

    When looking at what’s reasonable, lenders account for your income and any current debts that you need to repay each month. If you make $5,000 per month after taxes and need to pay $500 toward your car loan each month, a mortgage payment of $1,500 may seem perfectly reasonable.

    In this (extremely simplified) example, you’d have about $3,000 per month left over to handle all your other expenses. And perhaps you can afford your living expenses on this budget.

    But what about the other goals you want to achieve? What about saving for retirement or investing for your future?

    If you commit to a large monthly mortgage payment, you may find yourself squeezed to make your remaining money cover your living expenses, plus monthly bills and loan repayments. While a lender can give you a mortgage you can reasonably afford, it could mean not being able to handle other financial priorities.

  3. 3. You’re the only one who can determine what’s comfortable

    Only you can examine your life and values to determine what you are willing to spend on your mortgage budget — and what you’re not.

    You might be perfectly happy to take on a larger monthly mortgage payment in exchange for reducing meals out, cutting back on vacations, or sticking with your old phone instead of going for the upgrades just because you can. Or you may decide that renting makes more sense for you because you can mitigate costs, take on less financial responsibility, and enjoy more flexibility.

    Either way, you need to determine what you feel comfortable with. You need to decide what works within both your budget and your long-term plans to reach goals that matter to you.

  4. 4. Ask yourself these questions to decide how much house you can really afford

    Once you set your financial priorities, here’s where you’ll need to do the math:

    • What’s my current income? What are my basic living expenses? What are my fixed costs?
    • How much do I want to put away each month into savings or investments?
    • How much will it cost to maintain my new home?
    • What kind of down payment do I have? (The more you put down, the smaller your monthly mortgage payment will be.)

    Now you can factor a mortgage into all of the above, and see how much you can really afford. When doing so, don’t forget to count both the mortgage principal and interest — along with property taxes, homeowners’ insurance, and other extras such as HOA fees.

Post courtesy of trulia.com

How To Prep Your Bank Account To Buy A Home In 2017

Getting your finances in order can help you buy a home in the new year.

This is it: 2017 is the year you will finally buy a home! But even once you’ve made the ultimate decision to make the leap into homeownership, your hard work is far from complete. Buying a home is a big commitment and costs a lot of money — and getting the mortgage you want at the best interest rate possible is enough to stress anyone out. Organizing your financial house, so to speak, can help reduce that stress and set you up for home-buying success.

Whether you’re eyeballing a home for sale in Jacksonville, FL, or a humble abode in Phoenix, AZ, you can take action to prep your bank account and savings to be ready to buy a home in 2017. So, if your goal is to nab the keys to a brand-new place, these six steps will help you get organized, stay on track, and fund your dreams.

1. Set a specific goal

It’s hard to make a plan of action if you don’t know where you want to go. Look at how much it will cost you to buy a home in 2017. What amount of money do you need to save for that down payment? Your best option is to save at least 20% of a home’s purchase price. This allows you to get better options when it comes to mortgages and interest rates, and it means you avoid the extra cost of PMI (private mortgage insurance).

Once you have the specific target number in mind, you can break it down by month. If you want to save a total of $20,000 before you buy, for example, you need to put away about $1,667 per month to meet your goal at year’s end.

2. Designate a savings account just for your down payment fund

You can stay organized by putting the money you save for this specific purpose into its own savings account. Online banks like Ally or CapitalOne360 offer great options, because they allow you to have multiple accounts that you can designate for specific goals. (CapitalOne360 allows up to 30 accounts without a fee!)

Online banks also tend to offer higher interest rates in the current low-rate environment than traditional, brick-and-mortar banks. But that’s not a hard-and-fast rule. Shop around and look for a bank (or credit union) that offers the best savings account option, with the best interest rate — and don’t settle for an account that charges you fees. There are too many no-fee options available.

3. Create an automatic transfer

You have your specific goal and now you know where you’ll put that money while you save. The next step: Set up an automatic transfer from your checking to that designated savings account. Setting up an automatic transfer is a great way of “paying yourself first.” You prioritize your savings by moving it into the designated account first. This means you won’t be tempted to spend that money like you might if it sat in your checking account for a while before you made the conscious decision, month after month, to transfer it to savings.

It also means you’ll make progress toward your savings goal even if you forget about it one month (or two). An automatic transfer means you won’t fall short of your goal at the end of the year simply because you forgot to move the money to the right savings account.

4. Revise your budget to cut costs

Depending on how much you want to save for a down payment, you may need to move a lot of money from checking to savings each month. This can severely limit your cash flow and leave you short in other areas of your budget. To prevent this, review your budget with your monthly savings goal in mind. Where can you cut costs so you can afford to save this much per month? Start by looking at your discretionary income. You don’t need to eliminate everything, but could you cut back on how much you spend to eat meals out, for example?

Don’t forget to evaluate your bills and living expenses too. While you may not be able to cut these costs entirely, you can take action to reduce them. Call providers and ask about discounts or lower-priced options. Every little bit of expense you can eliminate makes it that much easier to add to your savings so you can stay on target.

5. Allocate extra funds to your home-buying goal

In addition to freeing up money from current costs in your budget, you can allocate any extra money you make to your down payment fund. This can accelerate your progress toward your ultimate savings goal — and even help you exceed it. Put any kind of windfall toward your designated savings account. This could include overtime pay, quarterly or annual bonuses from work, or extra money you make on the side (but be sure to set aside funds to cover taxes on your added income). Allocate at least half of cash gifts to savings too.

6. Resist making massive transfers before you apply for a mortgage

You’ve worked hard to save up the money you need to buy a home in 2017. You know your home-buying budget, you’ve identified a lender, and you’re ready to apply for a mortgage. Now is not the time to do anything drastic with any of your bank accounts. Remember, when you apply for a home loan, the lender will carefully scrutinize all of your financial activity. You’ll need to explain the source of any large transfers and provide documentation for proof.

Talk to your lender about what kind of funds they’ll approve and what cash they won’t allow you to use toward a down payment. Ask what documentation or proof you need for different kinds of transfers. Doing so now will help you prepare to buy a home in 2017 and secure the mortgage you need to help you reach your goal.

 

Post courtesy of trulia.com

The Crazy Things I Did to Save for a Down Payment (and How They Worked)

About a year ago I decided I wanted to buy a house. I got seriously excited about it. I even picked out a custom refrigerator and looked into getting a Lowe’s credit card to cover all of my remodeling needs.

I thought of everything—except for how I was going to, you know, pay for it.

After a few quick calculations, I figured I’d need about $50,000 to get to20% down.

And then I started to panic. I didn’t even know what $50,000 looked like. I’m not independently wealthy. My chosen occupation as a writer doesn’t exactly bring in those dolla, dolla, bills. If I suddenly had $50,000 in my savings account, my bank would probably do a double take just to make sure I hadn’t embezzled it. Maybe they’d call the Feds to make sure I wasn’t running a money laundering business on the side.

But I really wanted that house—and I knew I was going to have to get creative. Over the past 12 months, I feel like I’ve read every “saving for a down payment” article in existence and tried just about every trick in the book this side of legal. Here’s what’s worked (and what hasn’t).

Throwing a garage sale

If you have a lot of unwanted stuff and tons of patience, a garage sale can be a good way to make extra cash. One blogger said she made more than $1,000 at a garage sale. She apparently had some very nice stuff.

I didn’t fare quite as well for two reasons:

  1. You need to sell a lot of things to make good money. Quantity matters more than big-ticket items.
  2. It’s a lot of work. You have to get up crazy early. You have to deal with people all day. You have to sit in the sun. Both days I called it quits early just to get back inside.

 

Total saved: $225

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Selling Funko Pop Vinyls

Funko Pop Vinyls are small, vinyl figures (think Beanie Babies for millennials) people are auctioning off for big bucks. I happened to pick one up at a convention a few years ago. One day I read it was worth $260. Sold it!

For a hot minute I thought maybe I could sell other Funko figures. For about a week I was a collectibles sleuth, looking up prices and hunting for pieces. I bought six more for $10 each, sold two at $40 each, and then quickly realized this was not worth all of my spare time. I ended up with a teeny profit and four unsold figures that now live on my desk.

Total saved: $280

———

Quitting Jamba Juice

I have a serious smoothie addiction. If I pass a Jamba Juice, I’m going in—typically three times a week. (Seriously, they know my name.) At roughly $4.50 a pop for the megasize smoothie I always think I need, I spend about $54 a month in the store. So I stopped. Using all of my willpower, I’ve been passing Jamba Juices by for 10 months now.

Total saved: $540

———

Lowering my car insurance

If you want to live on the wild side or your car, like mine, is worth barely anything, you may not need full coverage. I decided to drop my insurance to the state minimum last year—going from $268 to $117. (And then I immediately had a close call when I backed into my neighbor’s parked car. Thankfully, I somehow wasn’t at fault.) I’ve saved a ton, but I can’t honestly say if the mini-panic attack every time I get behind the wheel is worth it.

Total saved: $1,812

———

Selling my book collection

I have a lot of books. Quite possibly too many books. My local bookstore will buy used books for cash or credit. So I packed up five boxes and hauled them to the store. I was offered $1 a book or $3 store credit. Since I need more house and less books, I opted for the $1. I’d like to think it’s nice that someone else is enjoying my collection, but my back still hasn’t forgiven me.

Total saved: $60

———

Borrowing from Mom and Dad

OK, this one is a little cheeky since I didn’t actually have to work for it. But asking the folks to fork over a big load of cash because you miss Jamba Juice and your back hurts and you’re too scared to drive your car over 30 mph isn’t the easiest thing to do. They said yes (hooray), but they’re holding out on handing over any cash until I’m about to close on a home.

Total saved: $30,000—eventually

———

All told, I have an extra $2,917 in my dream house account (even if some of that is theoretical). Was it worth all the sacrifices and backbreaking labor? I’ll let you know when I’m in my new house. Someday.

 

Courtesy of realtor.com.