All About the Benjamins
Uncle Diddy said it best...It’s All About the Benjamins. This holds true when it comes to making a decision to purchase a home too. People love to say that monthly mortgages cost the same as rent. So if that is the case, why wouldn’t you purchase a home? I’m probably the biggest proponent for home ownership, however we need to be proactive in considering all relevant expenses so we make smart financial decisions. Let me take you on a home buying journey from a financial perspective...
Imagine your realtor finds a place you LOVE for $195,000. You’re pre-approved on a conventional loan with an interest rate of 3.99% over 30 years. You put in an offer and it’s accepted. YES! But what’s next? Well, your realtor will need to collect an option fee from you to deliver to the seller or the escrow agent. This serves as security to let the seller know you’re serious. The amount of security required will fluctuate with the temperature of the market. We’ll pay $200. This money will eventually go toward the cost of your home. Next, we need to pay for the inspection and the appraisal. These are professionals certified to make sure the house is functional and worth what you’re paying. Let’s say the inspection costs $350, and the appraisal costs $450. These expenses won’t go toward the overall cost of your home, so choose wisely! In most cases, this will sum up the out-of-pocket expenses that are needed to be paid before closing.
Now for the big shabang! How much money do you need to bring to closing? Let’s start with the obvious down payment. It is expressed as a percentage and can be as low as 3.5% for an FHA loan, and as low as 5% for a conventional loan (which is what we have for this scenario). That’s $9,750. We still need to pay our loan costs (loan origination fees and other service fees) and our “other costs” (rolls eyes). These “other costs” can catch us off guard if we don’t do our due diligence. For example, if there is no existing land survey, we may need to order one. Let’s say we negotiated for the seller to cover this one. CLUTCH! We still need to pay premiums, initial escrow costs, taxes and fees and HOA dues. When it’s all said and done, we may be required to bring $11,000 to closing. Make sure you read your Closing Disclosure thoroughly, and ask questions until you can’t think of any and then find some more to ask.. Know where your money is going! I encourage anyone purchasing a home to have at least 1.5% of their anticipated closing costs available in their bank account. The extra cushion could be used for furniture/decor or simply to ease the slight depression you may feel as you watch all that money leave your bank account dollar by dollar.
Now, expenses don’t stop at closing folks! In our example, our principal and interest payment could be as low as $880 monthly, however we have to contribute to our escrow. Our escrow account holds funds for our mortgage insurance and property taxes. Let’s say we contribute $550. Our mortgage payment is $1,430. I live by the 28/36 rule. Your mortgage payment (Principal, Interest, Taxes, and Insurance or PITI) and HOA dues should not exceed 28% of your monthly gross income and your overall debt payments (PITI plus credit cards and miscellaneous bills) should not exceed 36% of your monthly gross income. Meaning we could stay financially comfortable in our dream home if we gross $5,100 and our “other debt’ doesn’t exceed $406.
Don’t worry if you didn’t pass algebra with flying colors, there are several ‘Google-able’ mortgage calculators that will help you figure out exactly what you can afford based on your income. Now if we don’t bring in this much money, we have more recurring debt or we simply want more cash in our pockets, there are alternatives. We could potentially rent out our second room, take more time to save and put more money down or use discount points to lower our interest rate. About a year into purchasing my home, I had a tenant move in and stay for about a year. The layout of the house lent itself well to roommate style living and she was paying half my mortgage!
Buying a home is a wonderful accomplishment that brought me so much joy. I believe everyone should consider it in regards to their own situation. I also want for us to keep it real and be proactive and intentional with our money, so that we can continue to grow and flourish in wealth! I know this was a lot of (valuable) information but if you have any questions please feel free to comment below or reach out via DM on my real estates IG page: @stephanie_renee_realty. I would love to hear about your buying experience and what you learned through trial and error during the process.
With respect, love and well wishes always,