Homeownership and budgeting go hand in hand. Many people find that budgeting is the key to buying a home and making mortgage payments on time, and a good monthly budget can help make your homebuying goals a reality. This is why Solarity Credit Union offers our loan payment calculator to borrowers. Understanding the cost of your monthly mortgage payments will make it that much easier for you to develop a monthly budgeting plan. If you’ve been considering applying for a home loan, then you’ll benefit from these helpful budgeting tips for homeownership.
1. Determine how much home you can afford
Getting a rough estimate of how much your mortgage payment will be is easy when you have the right tools. Lucky for you, you don’t have to be a math whiz to get an accurate estimate of your payments. Use Solarity’s loan payment calculator to assist you in estimating your potential monthly home loan payment. This is a helpful tool for future homebuyers to determine if they can truly afford the kind of house they’re interested in.
To use the loan payment calculator, you’ll need to have a rough idea of some financial details. What is the purchase price of the home you’re considering? How much do you have for a down payment? Answering these questions will make your estimate more accurate. You don’t need to know the exact numbers, though. You can play around with the calculator to get an idea of how your payment is affected by different purchase prices and down payment amounts.
The payment calculator also gives you the option to choose a loan term between 10 and 30 years. A higher term usually means a lower monthly payment but more money paid over time. Try a couple of different terms to see which fits your budgeting needs better.
2. Figure out your household income
Income is one of the deciding factors when it comes to getting approved for a home loan. Lenders like to know that you’re bringing in enough money on a monthly basis to cover the costs of both your loan and your monthly expenses. When considering homeownership, you should determine how much money you’ll have to work with each month.
Your household income isn’t necessarily limited to just what’s shown on your paycheck. On the contrary, income can include money from a side gig, such as freelance work, or from a secondary job. It could include the income of your spouse or partner, if you’re buying the house together, or disbursements from an account such as an annuity or pension.
Add up these multiple streams of income to determine your total household income. Having an accurate idea of that amount will be helpful when building your budget and determining how much home you can afford to buy.
3. List your monthly expenses
When thinking about homeownership, it’s important to take into account your total monthly expenditures, including the cost of your housing (whether that’s rent or a mortgage). To get an accurate picture of your current financial situation, make a list of all your recurring monthly expenses. This can help you understand where your income is going every month and how much more you might be able to allocate toward your housing expenses when you become a homeowner. You may find that you need to make adjustments in order to budget well for homeownership.
Some examples of monthly expenses might include groceries, clothes, utilities, insurance, transportation and eating out. After a few months of observation, you may find that you’re spending more than necessary in one category. Correcting that category to spend less may help make homeownership a reality for you. Writing this information down and creating a visual is a great way to enforce budgeting goals and increase your savings toward homeownership.
4. Understand what additional payments you’ll be making
Many potential homebuyers think that their rent payment will just be replaced by a mortgage payment, but there’s more to it than that. Buying a home will require you to also pay for a few other monthly necessities. Those unexpected payments may very well increase your monthly living expenses to more than what you’re paying in rent, depending on where you live. Understanding what payments will be expected of you after you buy your home can help you plan your new monthly budget.
One of the new payments you’ll be required to make will come in the form of taxes. Property taxes will vary depending on what city or state you live in, but most places will require you to make them. Home insurance and homeowner’s association (HOA) fees are a few other monthly payments you’ll need to account for. Home insurance is typically required by all mortgage lenders, while HOA fees will only be necessary depending on the neighborhood you live in. You could have private mortgage insurance payments, too, depending on the size of your down payment. And don’t forget to set aside money for normal home repairs that come up.
While these fees may only be required annually or semiannually, it’s helpful to break down those costs into a monthly amount when budgeting and put that money aside in a separate account. That way, you’ll have the money available when the expense is due, and you can make the payment on time without straining your budget. Accounting for these extra expenses early in your planning can help you determine whether or not you’re truly ready to take on the responsibility of buying a home.
5. Pay off debts
Debt can play a major role in your monthly budgeting, depending on your priorities. If your budget is tight, you may have put some of your debt on the back burner. This is often done by paying the absolute minimum on debt payments or, in some cases, skipping payments altogether, whether done purposely or accidentally.
To give yourself the upper hand, you should prioritize paying off your debt when you budget for homeownership. The amount of debt you have can affect how much you are able to borrow when you’re ready to buy a home. Lenders look at your debt-to-income (DTI) ratio as an indicator of your ability to repay your mortgage. For this reason, it’s best to pay off as much debt as you can before you begin applying for home loans. And when that’s not an option, you should build an aggressive payment plan into your monthly budget so you can get rid of your debt as quickly as possible.Homeownership can become a reality when you have the right tools to budget correctly. Check out Solarity Credit Union’s loan payment calculator or speak with one of our expert Home Loan Guides to get a better idea of how much home you can afford today.