July 18, 2018

Financing Your Home Purchase

The following in advice and information on financing. It is provided as an overview only to familiarize buyers with concepts and does not constitute professional lending advice that can only be rendered by a licensed lending institution. Please check with your lender for specific information relevant to your situation.

How Much can I afford?

How much a buyer can afford depends on several variables. The first few considerations include how much cash is paid up-front, the transaction cost, and how much the buyer can afford as a monthly mortgage payment.

Buyers must consider and calculate the potential costs of each. The cash needed to complete a real estate transaction includes the down payment and the closing costs.  The best way to get a grasp of this cost is to speak with a lender, ask for a “good faith estimate” and then a pre-approval letter based on that estimate. As a general rule, figuring the down payment is relatively easy, but it all depends on the type of loan you choose. Conventional loans require a minimum of 5 to 10 percent of the sales price, while other government-insured loans require less, such as a Veterans Affairs loan with zero down payment and FHA loans with 3.5 percent down payments. Please note that loans with less than 10 percent down usually include additional fees and monthly premiums. Consult a lender for details.

To estimate a mortgage payment, figure out a minimum of three monthly costs. First, figure the principle and interest payment to the mortgage company. You can use the calculator to the right to assess that fee based on the current interest rate. To determine a potential interest rate, look at the chart above or to the right that includes today’s estimated average rate. Remember, your lender will determine rates based on your personal credit standing and other issues. Enter your mortgage amount and the interest rate to get the principal and interest number.

Next, determine the annual taxes on a potential property (usually included in the listing).

Finally, estimate insurance, which depends on a host of factors related to the property size and amount insured. Monthly cost can range from $50 to more than $100.

Another possible cost is mortgage insurance, which again depends on the loan. If you put down 20 percent or more, mortgage insurance is typically not required.

Add these numbers together, and voilà, you have your monthly payment.

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