One of the first things potential homebuyers probably should do may not be what you think it is. It may not be settling on how many bedrooms or bathrooms, or whether you want hardwood floors vs. carpeting.The first step you may want to take toward buying a home is to calculate what an affordable home is. What constitutes affordable can vary among home buyers. But this blog will help you form an idea of what affordable means to you if you don’t have one already.
The first step in this process is estimating what your principal and interest would be. There are two ways you can do this. As we mentioned in a previous blog, you can talk to a lender to get pre-qualified or pre-approved. Pre-qualification takes borrowers’ estimates of income, debt-to-income ratio, and estimated credit score.
A lender can then estimate what kind of interest rate borrowers will receive. When a borrower compares those estimates with potential loan amounts based on the homes they want, they can then calculate what their monthly payments will be. Pre-approval is a more formal process and pulls actual statements to determine income, debt-to-income ratio, and gets an official credit score rather than just estimating.
Principal and interest will be the biggest portion of borrowers’ monthly payments. But there are other finances to consider when calculating overall housing monthly payments:
- Homeowner’s insurance – Borrowers should factor this cost into their overall monthly payments. Contact local home insurance agents and they should be able to provide estimates for homes in the areas borrowers seek to purchase a home.
- Property taxes – Contact your local tax assessor and that person can help a borrower estimate what the yearly taxes will be for your area. The assessor will likely give a yearly amount.
- Mortgage insurance – If borrowers don’t provide at least 20 percent for a down payment, they may be required to get a mortgage insurance policy which insures lenders in case borrowers default on their loans. However, many mortgage insurance policies can be eliminated once borrowers have 20 percent equity in their homes.
- Homeowner association or condominium fees – If a borrower seeks to move into a condo, or an area with an association that provides services such as landscaping or snow removal, that often will be an extra monthly fee.
Part 2 of our glossary of mortgage terms explains some of the most common concepts associated with mortgages.
We cover the most common terms associated with securing a mortgage to help you have a greater understanding of the application process.
When starting to research getting a mortgage by learning the difference between Freddie Mac and Fannie Mae.