First-time homeowner info roundup

How to figure out what home you can afford

Before you start imagining your first home, you need to be realistic. Determine how much home you can afford by evaluating your financial health. Some factors you should consider and steps you should take are:

• Income spent on mortgage payments: As a rule of thumb, you shouldn’t spend more than 28 percent of your gross income on a mortgage. For example, if your household income is $5,000 per month, you shouldn’t spend more than $1,400 on a monthly mortgage payment.
• Calculate your debt-to-income ratio. Calculate your monthly debt payments—credit cards, student loans, car loans, child support, etc.—and divide it by your monthly income. This will give you your debt-to-income (DTI) ratio. An ideal DTI is typically below 36 percent to qualify for a mortgage.
• Calculate your monthly budget: In addition to a potential mortgage payment, account for additional costs including utilities and living expenses.

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How much to save on a down payment for a house

The first step on the road to homeownership is knowing how much you need for a down payment. Luckily, if you’re buying your first home, there are plenty of loan options to help. Many people assume you need to put down 20 percent to qualify for a conventional loan. However, Federal Housing Administration (FHA) loans may allow for down payments as low as 3.5 percent and lower credit scores than conventional loans. Department of Veteran Affairs (VA) and U.S Department of Agriculture (USDA) loans also offer discounted loan options for veterans and rural residents who have lower incomes. As a rule of thumb, your monthly payment shouldn’t be more than 25 percent of your income. To help save for your first down payment, try the following:

• Follow your monthly budget.
• Cut unnecessary spending on non-essentials like eating out, entertainment, clothing, and expensive vacations.
• Keep savings in an account that you can quickly and easily access.
• Pay off your debt to improve your credit score.
• Automate your savings.

Closing costs

In addition to your down payment and mortgage payment, closing costs are an additional expense. They are usually 3-6 percent of your mortgage loan. Closing costs are the responsibility of the buyer and cover mortgage fees—like credit reports, applications, and underwriting—and property fees, which includes appraisal, inspection, and title search and insurance costs.

What is an adjustable-rate mortgage?

An adjustable-rate mortgage is a loan with an interest rate than may fluctuate during the loan period. An ARM loan is divided into two periods—the initial period and the adjustment period. The initial period keeps the loan’s interest rate fixed, for an agreed upon time between six months to ten years. Once it reaches the adjustment period, the interest rate will fluctuate based on market and loan conditions. However, there is a cap that restricts how much it can change.

What is amortization?

If you evaluated loan options, you have probably heard the term amortization. Amortization is paying off a loan over a fixed period. You make fixed payments toward the principal of the loan and the incurred interest.

To create your amortization schedule, take the original loan amount and multiply it by the interest rate. Take that number and divide it by 12 to get initial month’s interest charge. Once you have the interest amount, subtract it from the monthly mortgage payment amount. This will determine how much is being applied to toward the principal.

Buying your first home is an exciting process and is one step to help achieve long-term wealth. You can pass down your home to your family, and dependent on market conditions and maintenance, it can be a lucrative investment to help them accrue wealth. Prepare to purchase your first home by determining how much you can afford, need to save, and other financial obligations. If you are trying to save for your first home, learn more budgeting tips.