Once upon a time there were 3 little pigs that wanted to buy a house. Each of them had their own ideas on where they wanted to live so they each went off to find a home.
House of Straw. The first little pig met with a lender and to its surprise could qualify for a sizeable mortgage. The little pig was so excited that it went out and purchased a home way beyond its means.
House of Sticks. The second little pig had very little savings to put down; however, it qualified for a mortgage as well. So, this little pig went off to find a home.
House of Brick. The third little pig had prepared a budget and knew exactly what size payment it could afford, so it went off to find a lender to calculate the amount of loan that would not go over the budgeted payment. Although the pig could afford more on paper, it knew the amount it could not exceed.
So, where’s the Fox? When purchasing a home, the fox appears in many situations. For the first pig, it was the amount of home for which it qualified. Based on the data the lenders gather, one may be able to qualify for a large loan amount/payment; however, based on their budget, the mortgage payment may be too much to afford.
As for the second pig, since it did not have 20 percent to put down on a home, it will incur PMI (private mortgage insurance), which is added to the monthly payment. This additional amount may cost up to 1 percent or more of the entire loan amount annually. —If the home loan is for $200,000 and the PMI is 1 percent, you will pay an additional $2,000 per year or $166.67 per month. Although this doesn’t sound like a lot, that amount added to the mortgage payment may put you in a situation that you can’t afford. PMI doesn’t go away until the loan is paid off or the house is refinanced with enough equity.
Regardless, all the little pigs need to have a budget, know how much of a mortgage payment they can afford, and plan for the unexpected. A down payment and good credit is just a start. There are many other costs incurred when you buy a home: application fees, closing fees, appraisal fees, home inspection, pest inspection, home warranty, and the list goes on. Don’t forget if you currently rent, you will need homeowner’s insurance or if you currently own, you will need to adjust the amount of the homeowner’s insurance. Other considerations include property taxes, changes in your utility bills, and association dues.
Once you’re in your new home, you may want to make improvements or get new furniture, all of which should be accounted for in your budget.
Michele Sarna is a financial advisor at Beacon Pointe and can be reached at (760) 932.0930.
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