Tips to start your first mortgage on the right foot
Homeownership is an exciting achievement, but it’s also a huge responsibility. Entering into home-ownership when you’re ready is more important than doing so right away. Starting off on the right foot can positively impact future home-buying opportunities, while rushing into a situation you’re unprepared for can limit your options down the road. Make sure you have a clear, accurate idea of your budget before you buy your first house to confirm that you’re ready for the biggest purchase of your life.
Calculate your available income
Financial expert Dave Ramsey recommends that your first step should be calculating your income so you know how much you have available to spend on a mortgage.
Here’s how he suggests doing so:
Look at your pay stubs to determine how much money you bring home every month after taxes, healthcare and retirement savings are removed. If you have a reliable partner who will be co-signing on the house and contributing their income, add their income to your calculations. This will show you your monthly income.
However, most of this amount won’t go toward your mortgage. Calculate every other expense you’re currently paying and subtract it from your total income. This includes food, transportation, insurance, charitable giving, clothing, family expenses, medical costs and any fun or charitable expenditures. Don’t forget to always set aside some of your income for emergency savings, too. Rent and utilities you currently pay would just go toward your new mortgage instead of your current residence, so you don’t have to include those.
Whatever you have left after subtracting other expenses — with some wiggle room for surprises — can go toward your first house.
Calculate your target house payment
Now that you know how much you can spend, you can start estimating the house you can afford. Money Management International suggests giving yourself plenty of time to study your target location — at least a year, if not more. Monitor the going rate for homes in different neighborhoods nearby and the age, style and condition of said homes. Gradually, you’ll build a map of areas that fit within your budget and recognize a good or bad deal when you see it.
When calculating theoretical monthly payments, Ramsey recommends factoring for a 15-year fixed mortgage, which is a better value than the standard 30-year mortgage. However, if you cannot afford a 15-year mortgage, many first-time buyers go with the 30-year and refinance once they’re in a better financial situation.
Don’t forget to include expenses outside of the principal and insurance through your lender. Money Management International points out that owning a home also requires paying property taxes, homeowner’s insurance, utility bills and property care. These should also factor into your estimated monthly payment on a house.
Altogether, Ramsey advises that your monthly house payment shouldn’t exceed 25 percent of your take-home income.
If your estimated monthly cost of owning a house exceeds that amount of your income, you have two options: look for a more affordable house or find a way to increase your income. Since this is your first home purchase, experts recommend the former for one reason in particular: saving for initial costs.
Don’t forget about initial costs
Buying a home will cost you more than just a recurring monthly payment. The initial sale can cost thousands of dollars for application fees, inspection and initial repair costs, realtor fees, closing costs, taxes and moving expenses.
Above all, save for the down payment. You’ll want to pay at least 10 percent of the total price of the house up front when signing, though James McWhinney of Investopedia recommends aiming for 20 percent to avoid paying private mortgage insurance.
If you need to wait longer to save more money for a down payment, build credit for a better lending rate, find a better deal on a house or get a higher-paying job to meet your target; don’t hesitate to delay purchasing. Remember that this is your first home and doesn’t have to be your forever home.
Police FCU can help
Police FCU offers competitive rates on many mortgage options including fixed and adjustable low rate loans, a first-time homebuyer option, conforming and jumbo mortgages, and alternative programs such as 15/15 ARM. Financing options available on vacation homes, second homes, and investment properties.
Click here to visit our mortgage page or call 301-817-1200 to speak to a representative today.
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