Homeownership – The 20 Percent Rule
According to this rule, you should put at least 20% when buying a home.
Why It Works: It ensures you don’t spend more home than you can afford, it can lower your monthly mortgage cost, and it can increase your chances of being approved for a loan.
When It Doesn’t: While this is pretty traditional advice that’s a safe bet, opinions vary. Some consider it an overwhelming amount to save. Some argue that, while a home is an asset, you shouldn’t give up your liquidity, or savings.
Don’t buy a house that costs more than three years’ worth of your gross annual income. Some variations say no more than two years; others say two and a half. So here are some factors to consider for calculating the home you can afford:
- Take-home pay (after taxes, after tax-deferred retirement contributions).
- All of your other debt (credit card, rent, car loans, etc.) (If you have high interest loans, you should pay them down before looking to buy a home.
- Monthly payments (WASA, T&TEC, TSTT, etc.)
- Consider your other priorities (children’s school fees, retirement)
- Calculate your down payment amount. It might make more sense to save and wait.
- Use a mortgage calculator to see how much you can afford (most financial institutions have these online).
- Leave a cushion in your monthly budget between income and total monthly expenses.
But there’s a long list of expenses, including closing costs to consider. And it all varies… so watch out for these closing costs when buying a home:
ü Lender Fees
- Application Fees
- Processing Fee
- Credit Report Fee
- Appraisal Fee
ü Title Fees
ü Attorney Fees
Yes, it’s overwhelming and confusing! As one institution might advertise that it doesn’t charge an ‘application’ fee up front, for example. But it makes that up by charging a ‘commitment’ fee or ‘doc prep’ fee at closing.
Next week…why net worth is more important than income.
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