Thinking of Buying a House? Do your Homework First
I think it was Will Rogers who said "A fellow that owns his own home is always just coming out of the hardware store…" Most homeowners would agree but, often in the excitement of house-hunting, we tend to overlook some of the sobering realities. Before you start, be sure you're comfortable with the obvious and less obvious costs of home-ownership.
The Price Range
First determine how much house you can afford. Take a ballpark figure by multiplying your income before tax by 2.5. This formula is used by lenders to establish the price range for various income levels. Using this formula, and income of $50 thousand ($50 x 2.5) would put you in the $125 thousand price range. Then estimate how much you can afford for a monthly mortgage payment. A lender's rule of thumb here is usually about one-third of gross monthly income. Keep in mind that the one-third guideline includes not only the mortgage payment but also property tax and any other secondary financing or condominium management fees, if applicable.
Test this guideline by reviewing your current spending. Do you, for instance, have a commitment to a car or personal loan ? How much do you spend on rent, clothing, transportation, entertainment and travel? Would the guideline mortgage payment still be comfortable considering these expenses?
Consider the cost of living in the home. How much will it cost to heat monthly? What about the monthly cost of insurance, electricity, water, maintenance - painting, repairs etc.? If you are considering buying a condominium, what effect will the monthly management fees have on your ability to carry a mortgage?
It can be difficult to forecast the cost of living in a home as compared to living in an apartment. Here is another rule of thumb that may help you to estimate the difference between the two. Take the value of the home you are considering and multiply it by 3 per cent. Then divide that figure by 12. In our example of the $125,000 home, the monthly cost using this formula would be roughly $312 in addition to mortgage and taxes.
The Down Payment
The size of your down payment is a major part of your mortgage consideration. Most lenders will require a minimum down payment of at least 10 per cent of the purchase price of the home. For instance, our example of a home in the $125,000 thousand range would require a $12,500 down payment. You would then need a mortgage of $112,500.
When you have made an offer, had it accepted and begin to finalize the purchase, there are other costs to be paid in full. There are legal costs, registration costs, possibly house inspection costs and probably a land transfer tax. Your real estate agent will give you an estimate of these costs. Be sure to discuss with your agent the question of what lenders call "interest adjustment date", depending on the date of your closing and the date of mortgage payment upon closing. Be prepared to pay for any heating oil left when you take over and to re-imbrues the seller for property taxes paid in advance. Don't forget about moving charges, your mover will give you an estimate before you move. You will have to pay the movers upon delivery of the furniture.
The way Will Rogers saw it, home-ownership is all work and no play. But, the pleasures of having a place of your own usually outweigh the work involved. Be sure you get maximum enjoyment from the experience by buying within your means.