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Buying a home is probably the largest purchase you will ever make. So how do you determine how much you’ll end up paying and avoid expensive surprises? The two big unknowns are typically: 1) what will be my monthly payment and 2) how much will I pay upfront?
While there are plenty of online mortgage calculators that can get you part of the way, they often fall short by using estimates and averages for numbers that can make a big difference is your financials. The first step in getting an accurate view of the cost of buying a home is to do some research:
- What is the purchase price? This is the easiest part. If you’ve got an accepted offer, you already know what the home will cost. If you have a home in mind, you can start the number crunching using the listing price, and hope that it will come down in negotiations. Every calculation will be based off the purchase price of the home.
- Determine your down payment: Typically mortgage lenders want 20% down payment, but you can put down less in some circumstances. Determine how much money you can afford to put down.
- Research interest rates: Interest rates are at historic lows right now, so it’s a good time to be a buyer. But, your personal interest rate depends on the mortgage lender, your credit score, type of loan and how much you put down. NerdWallet provides a list of top mortgage lenders in 2020 to give you an idea of what’s out there.
- Identify the best type of loan for you: There are multiple types of home loans. The most common is a fixed rate 30-year loan, but there are also adjustable rate, VA and FHA loans. As you shop around for mortgage lenders, ask about the types of loans they offers and the rates for each.
- Ask for the annual property taxes: There are the lucky ones who don’t even think about property taxes when looking at homes. I’m from NC, and bought my first condo there years ago. I couldn’t have told you what my taxes were, but I know they were low enough to not make much of a difference. Now I live in New York…where property taxes can double your monthly payments (Yes, double. It was a shock to the system.). So taxes matter in some places more than others. But if you want to get an accurate monthly payment, ask for the property taxes.
- Estimate your homeowners insurance: Like taxes, this can be a small addition or a significant expense, depending on your carrier, home and where you live. Bankrate gives an average by state.
Now that you have the right information and input, you can run the numbers.
1) Determine your monthly mortgage payments: This is when you can confidently use an online mortgage calculator. There are several simple ones to help you calculate your monthly payments – just remember to change their property tax, insurance and interest rates assumptions and use your specific inputs.
2) How much will you pay upfront? For first time home buyers, closing costs can be an unpleasant surprise. Yes, not only are you putting down an enormous amount of your savings towards this purchase, you also have to write an additional check to cover fees. Closing costs vary based on your home, and cover origination charges, title insurance, inspection fees, legal services, prepaid expenses and escrow. Typically, home buyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees. For example, if you buy a home for $300k, you could owe $60k for the down payment (20%), plus up to $15k in closing costs. SmartAssest has a thorough calculator to give you an idea.
Understanding how to calculate your costs is critical when it comes to buying a home. It not only helps you determine how much you’ll pay, but more importantly, how much you can afford.