Buying a Home 101 Series – Week 3
Welcome to Week 3 of my step-by-step guide to buying a home in San Pedro, CA or anywhere else in LA county. This series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks! In this article we will be going over how to find a San Pedro, Ca mortgage that you can afford.
One of the biggest mistakes you can make as a homebuyer is not knowing how much you can REALLY afford when purchasing a home. The next mistake is thinking too “big picture” when it comes to price range or purchase price.
Stop right here before you make these mistakes!
You’re going to learn the correct way to do the math so that you get a mortgage you can afford and, ultimately, a home you absolutely love on your budget. You won’t be “house poor” and you won’t shortchange yourself either.
Here’s how:
Think monthly payments first and foremost.
Don’t focus solely on the purchase price. Start with your desired monthly payment for your home, including taxes and insurance (but not utilities and general monthly maintenance).
This Mortgage Rule of Thumb may seem backward, but it’s the way to ensure you get the home you want for the price you want.
Here’s why.
Even if the purchase price is the same, your monthly payment could be very different between two properties. For example, a san pedro,ca mortgage monthly payments for a $500,000 condo will differ from those for a $500,000 single-family home due to costs like condo fees. That’s why you should NOT focus on the purchase price first since monthly payments can vary depending on where and what you buy.
Don’t just accept what lenders say you can afford.
Many buyers start with a price because their lender pre-approved that amount. But lenders might approve a mortgage for more than you’re comfortable spending per month. Buyers may say, “I’ve been approved for $500,000 by my lender,” but when you dig deeper, they actually want to spend less to get the payments they truly want each month.
Work backward to determine the “correct” purchase price for you.
First, figure out how much you want to pay per month, then work backward to determine a purchase price that works with this monthly budget.
Once you know your desired monthly housing payments, factor in your down payment and any homebuyer assistance programs. Include other potential costs of owning a home – taxes, insurance, condo fees – that will affect your monthly budget. With all these factors in mind, it can help you figure out the correct price range to shop in.
Keep in mind:
Every $10,000 in purchase price adds about $60-$70 to your monthly payment. Similarly, every additional $10K in down payment saves about $60-$70 per month. So, you don’t need to save for years for additional down-payment funds to afford a home. Remember, there are great options to help with your down payment.
Take a look at your budget to determine what you want to pay per month.
Make a budget! Be honest about what you spend each month, what you’re willing to forgo, and what you expect in the future.
Here’s what to include:
- List all the costs of homeownership — property taxes, mortgage insurance, home insurance, maintenance, utilities, condo fees, parking fees, if applicable. I can help with estimates!
- List all other expenses you expect to continue — such as gym memberships, daycare payments, car loans, school loans, gas or commuting fees, etc. The Rocket Money app can really help with keeping track of your monthly expenses.
- Estimate yearly maintenance costs for a home. Plan to spend or save about 1% of your home’s purchase price each year.
- Include any tax advantages you’ll get as a homeowner. You’ll have deductions or equity in your home and can expect a larger refund that could go toward your savings.
- Consider additional expenses beyond your mortgage payment and maintenance costs. Decorating costs such as new furniture can add up in the early years of homeownership.
What expenses are “mandatory” for your life and happiness?
Ask yourself hard questions about your lifestyle now and in the future, and how that could impact your budget. For example, if you love to travel, don’t buy a home that makes it impossible to go on a trip for years! That wouldn’t be worth it.
What expenses could you tighten up on to get the home you want?
If you rarely drive and are willing to take mass transit or bike, you could cut some of your monthly expenses. This could help you afford a home in the location you want.
Remember:
How much you can afford today can change next year and beyond. Yes, your salary might increase, but you’ll have new costs, such as kids or a new car. This is when you should look at the “big picture” of your life now and down the road.
Finish up the math to get an idea of how much you can afford.
Owning a home is about one-third more in cost than your current rent payment without changing your lifestyle.
Multiply your current rent by 1.33 to arrive at a mortgage payment that won’t bust your budget. This calculation takes into account the tax benefits of homeownership that can offset some of those additional costs. For example, if you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly san pedro, ca mortgage payment.
Contact me if you have any questions about calculating a monthly budget. It’s an important first step before you start looking at homes.
Once you know your monthly budget, other steps will follow. You’ll be able to determine your price range and work with your lender on available mortgage products and down-payment options.
Next up in my Buying a Home 101 series is Where to Find Money for a Down Payment. Every buyer needs to be prepared for this and you’ll learn how!
By focusing on these steps, you’ll find a San Pedro, Ca mortgage you can comfortably afford, making your dream home , a reality without stretching your budget too thin.
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