 SECURE YOUR FINANCIAL FUTURE! INVEST IN YOU!
Welcome back to Money 101, Invest in You: Ready. Set. Grow's eight-session guide to financial wellness.
Today we're focusing on buying a home — whether it is your first, you are moving up or you're downsizing.
Purchasing a house is probably the biggest investment you'll ever make. So, you need to make sure you do it right. That means being realistic about what you can afford and locking in the right mortgage.
But don't worry. We'll walk you through the steps to take that will enable you to make the leap. By following the challenge, you'll learn how to assess your home-buying budget, the types of mortgages available and other important details like home inspections and closing costs.
Thanks again for joining me — and happy learning!
Sharon
CHALLENGE #4: BUYING A HOME
How much can you afford? Lenders typically use a 28/36 rule, which caps total housing expenses at 28% of your gross income and total debt payments at 36%.
However, it doesn't mean you won't get approved for a mortgage if the debt-to-income ratio is higher, so proceed with caution.
Look at your budget. Write down your take-home pay and then subtract all your monthly expenses. What's left over should cover your monthly mortgage payments and other homeownership costs, like maintenance and repairs.
If you have at least six months of savings, you could stretch your budget a bit. On the other hand, if you have large fixed costs — like child care and health insurance — then you may not be able to spend 28% of your income on housing.
Check out Fannie Mae's affordability calculator, at KnowYourOptions.com, to help get a sense of where you stand.
Choosing a loan A mortgage covers the cost of your home, minus the down payment you make at the time of purchase. There are several different options available.
30-year and 15-year fixed: A fixed loan means the payments are locked in for the life of the loan. This is a good choice if you plan to stay in the same house for at least seven years.
Adjustable rate or hybrid ARMs: An adjustable rate loan starts out fixed for a period — five, seven or 10 years — and then the interest rates fluctuate on a monthly or yearly basis. This could be an option if you are willing to accept interest-rate risk in exchange for a lower rate and lower monthly payments.
Interest-only: With this type of loan, you only pay interest for a set period before principal payments are added in. Payments are lower in the short term but grow higher down the road. Unless you plan to refinance, be sure that your income will rise in the future, so you can still make the payments when the interest-only period expires.
Piggyback: Those who don't have 20% for a down payment typically have to pay private mortgage insurance. A way around that is taking out two loans (one mortgage and a home equity loan or line of credit) at the same time. The first mortgage covers 80% of the purchase price and the second covers whatever the down payment doesn't.
"Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world."―President Franklin D. Roosevelt
Navigating the process Before you start shopping around, get pre-approved for a mortgage so you know your price point.
Then, start researching neighborhoods and prices. Websites like Zillow and Trulia let you explore what houses have sold for in your prospective locations.
Once you put an offer on the home, get it inspected by a professional home inspector. This way you can find out what needs to be fixed and figure out the cost of those repairs. If you are unhappy with the report, you can cancel the purchase contract.
And don't forget about closing costs, which are typically 4% of the mortgage and include attorney's fees, title search and other one-time fees. Your lender is required to provide you with a "good faith estimate" of those fees within three business days of your loan application. However, this is only an estimate and the lender isn't responsible if it is off.
The bottom line Remember to consider all the expenses of a new home—from the mortgage to closing costs, from everyday maintenance to unexpected repairs.
By being smart about what you can afford and doing your homework, you could soon find yourself in the right home for you.
Next week, we'll tackle saving for college.
We look forward to continuing to help you — Invest In You!
Take a bow, you're half way done! By the time you're reading this line, you will have already learned: 3. Save for retirement 4. Buy a home Click on the link below to test your knowledge.
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