Home Buying: Learn What You Can Afford When Buying a Home in the Tuscaloosa & Birmingham Area
You've picked out some locations in the Tuscaloosa & Birmingham area you're interested in and you’ve thought about the style of home that suits you best. Now it's time for some planning of the less fun variety. Before you start looking at houses and, somewhat counter intuitively, before you start shopping for a loan, you need to figure out how much home you can afford.
For many people in the Tuscaloosa & Birmingham area, the dream of owning a home might become a reality this year. If you’re shopping around for a home and expect 2017 to be when you buy your first or next home to own, DSEAYCOM is here to help you figure out what you can afford for both monthly payments and the down payment, plus more tips for successful home buying.
There are 2 reasons for doing your own affordability calculations:
· To prevent yourself from looking at homes you can’t afford, and havingunrealistic expectations about the type of home you want to live in. This will make homes in the Tuscaloosa & Birmingham area that actually fall in your price range look less appealing. Start looking at the bottom of your price range or even below your price range and work your way up.
· To do your own math, because the bank may say you can afford more house than you would actually be comfortable paying for. While the bank will ask for very detailed financial information when you apply for a mortgage, it will not know the costs that eat away at your disposable income, such as your monthly grocery expenses are, how much you spend on gas, what your health insurance premium is, if you're diabetic and have high ongoing medical costs, what your water bill is, etc.
The following steps will clear up the daunting process so that you can easily figure out how much you can afford to spend per month on your first or next home.
1. Figure out your household's take-home pay after tax.
What do you and any other income-earners who will be contributing to the household bills bring home each month after tax? This is how much money you currently have to spend each month.
2. Make a list of your household's recurring monthly expenses.
This should include bills you pay every month such as the electric bill, and bills you only pay some months, like car insurance. If you don't already have a budget where you've been keeping track of these expenses, look at your checkbook, bank statements and credit card statements to help you figure out what you've been spending. Note which expenses are necessary(like electric bill), which are totally optional (like going out to eat and buying new clothes) and which are necessary but flexible (like your phone and grocery bills).
3. Make a list of the expenses that you will add when you become a homeowner
These expenses will vary depending on the type of home you purchase. In a condo or townhouse, you will most likely have to pay monthly homeowners' association fees, which will cover things like landscaping of common areas, upkeep of indoor common spaces and upkeep of recreational areas (like pools or clubhouses) and water, sewer and garbage costs. In a house, expenses you'll have that you don't have as a renter include water, trash and home maintenance. In any type of property, you'll pay property taxes and hazard insurance and if you're moving farther from your job, your transportation costs may increase.
It can be hard to estimate these expenses accurately when you're not familiar with how they are calculated, but if you can get some answers either from people who live in Tuscaloosa or Birmingham area, from a real estate agent who is familiar with the neighborhood or by making a few phone calls to city agencies and insurance companies, you can get a reasonable idea.
4. Figure out what expenses will go away.
For example, if you're paying renters insurance, you'll be able to cancel that. If you're planning to cut back on certain fun activities (like going out to eat or an adult education class that isn't related to your career) in order to free up more funds for the house, note these as well. If you're moving closer to work, your gas costs will go down.
5. Determine how much you have left after expenses to spend on housing.
Once you know what you take home and what you spend each month (excluding your current rent payment), determine how much you have left over each month to spend on housing. When you make this calculation, don't forget to leave room to save for emergencies, retirement and whatever else you want to have money saved up for. In other words, count savings as a non-negotiable "expense."
6. Figure out how much house you can buy
An easy way to do this yourself is to play with mortgage payment calculators online to figure out the purchase price you can afford based on the monthly payment at different interest rates. Take today's rate for your geographic area and your loan type and calculate your payment for 0.5% above and below that rate. If today's rate is 6.5%, calculate what you can afford at 6%, 6.5%, and 7%.
7. Make a Test Run
Before you buy, it is a good idea to go for a "test run" with the increased costs of home ownership. One thing you can do is take 30% of your expected mortgage and interest payment and add it back on. So, if your expected mortgage and interest payment is $1,100, add $330 so that your total estimated monthly costs are $1,430.
Then, consider the difference between what you pay now for your rental and the estimated cost. If you pay $850 in rent now, it means that you will pay an extra $580. Can you afford that much house? Find out with a real savings test. Next, open a high-yield bank account. Put that extra $580 in the account every single month. Do this for at least four months. Are you having difficulty making the new "payment"? If so, you might not be ready to purchase a home. The higher costs may exceed your ability to pay for them.
Before you buy a home, you need to make sure that you are truly ready to shoulder the costs. Otherwise, you will be house poor and your monthly cash flow will be strained.
A home is an expensive purchase, no matter what type it is. If you’re interested in buying a home, first figure out what you can afford. The general rule of thumb is to spend no more than 28% of your gross income on a mortgage, known as the “housing ratio,”. When doing calculations, include other recurring bills and responsibilities you have, as well as any debt you’re paying off.
Once you’ve figured out on your own what you can afford when you buy a home in the Tuscaloosa & Birmingham area, it's time to apply for a loan. If you need help calculating how much you can afford or you have more questions about buying your next home in the Tuscaloosa & Birmingham area, don’t hesitate to reach us! Here at DSEAYCOM, we listen carefully to understand your real estate goals and work hard to create solutions that make sense for you.
At DSEAYCOM, we’re happy to answer any questions you have about buying and selling in the Alabama area. Call us now or feel free to share our contact information with someone you know that needs expert help buying or selling their home.
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