Coming out of college, I had 3 goals: get a job, pay my student loans and buy a house. After landing my first regular paycheck, I was able to slowly get rid of my diploma debt and start saving for a down payment. I’ll admit I was pretty excited, but also a little nervous since buying a house is such a big commitment. At times I questioned if I was ready, asking myself: Do I really want to live in this area? How will I keep up with maintenance? What if I can’t afford the mortgage?
That last question made me take a hard look at my finances to make sure I wasn’t biting off more than I could chew. I wanted to own something I was proud of. Not something I regretted because it was out of my price range. The Fidelity Viewpoints article, "How much house can you afford?" gave me some good tips about how to figure out how much I was comfortable spending.
Adheesh Sharma, a director in Fidelity’s Strategic Advisers, Inc. says, “The two big mistakes that many first-time homebuyers often make are buying too much and buying too early.” Here are four moves that could be the key to your happiness as a homeowner:
- Up your down payment. Most times you’ll need to put down 20% of a home’s value to get a mortgage. Yes, there are ways to get around this if you haven’t saved enough, but it’ll cost you. You’ll probably have to pay private mortgage insurance (PMI) until you owe less than 80% of the home’s value. That could mean paying 0.5% to 1% of the total loan per year.
- Keep your credit in check. One of the first steps to buying a home is getting preapproved by a mortgage lender. They’ll look into your savings, income credit score, and outstanding debt to calculate the maximum loan amount that you can afford. A better credit score usually means that you could be approved for a lower interest rate mortgage.
Something to keep in mind: just because the bank tells you an amount that you can borrow doesn’t mean that you should borrow it all. A good rule of thumb is to keep your housing costs around 30% of your monthly income.
- Make sure your mortgage is right for you. You’ve found the perfect home, so now you need to find a mortgage. Make sure you do your homework and look at all of your options to find one that’s right for your budget and situation. Some might cost less in the short term, but more over time and some vice versa. It’s important to understand how your monthly payments will change over time and how they will affect your budget.
- Think about more than the mortgage. We’ve covered down payments and mortgages, but there are more costs to consider when thinking about how much home you can afford. You’ll need to pay closing costs, home insurance, property taxes and possibly home ownership association or condo fees. Plus, you’ll need to make sure other long-term goals like saving for retirement are still on track. Everything can add up quickly, so make sure you have extra savings especially in the first few months when unexpected costs tend to come up.
THE BOTTOM LINE:
Buying a house is a great accomplishment, but it’s important to look at the big picture and not necessarily the biggest house. The key is being responsible and having a handle on how much you can responsibly spend.
Take the next step
Before you start hitting open houses, use this tool to see how much house you can afford.