Owning your own home has long been part of the American dream. It's a goal most of us rightfully aspire to, and one that can often help build wealth. Indeed, 64% of Americans own a home today. If'
Go From Renting To Owning Your Dream Home
Dated: September 23 2018
If you currently rent but are looking to purchase a home in the future, preliminary steps like creating a budget and saving for a down payment are obvious. Here are a few more advanced steps toward moving out of your rental and into a dream home of your own.
Understand the full cost of home-ownership
As a renter, a single rental fee covers your monthly housing payment. Homeowners have four main factors that go into the monthly housing payment: principal, interest, taxes and insurance (P.I.T.I.). Understanding these costs will help you determine how much house you can afford.
Together, principal and interest make up the monthly mortgage payment. The principal pays down the loan balance every month and the interest pays the fee for borrowing the money. Use a mortgage calculator to determine how much of your payment goes toward principal versus interest each month.
Taxes refer to property taxes that are assessed by the county you live in.
Insurance is paid to a homeowner’s insurance company of your choice. It is required when you have a mortgage. Lenders require that your insurance covers the cost of rebuilding the home if it is ruined by fire or other disaster. This “replacement cost” is determined by your insurer, and must be agreed to by your lender also. The average homeowners insurance policy in DFW costs around $1400 per year.
For condo owners and homeowners in certain neighborhoods, there’s a fifth monthly cost category: homeowners association (HOA) dues. These fees cover common area amenities, landscaping, ongoing upkeep and reserves for future maintenance like roof replacement or exterior painting. These monthly dues can range from $100 to over $500 per month.
Know your homeowner tax benefits
Mortgage interest and property taxes are deductible when you file your annual tax returns, and reduce your taxable income.
People tend to judge the cost of renting versus buying by comparing P.I.T.I. to a monthly rental payment. But to make a fair comparison you need to look at after-tax-benefit home-ownership costs and rent costs.
Identify mortgages that fit your budget and timeline
If you don’t have 20% to put towards a down payment, you can still get a mortgages as little as 3% down. However, if your down payment is less than 20 percent, you’ll have to pay mortgage insurance, which is about .85% of your loan amount, and isn’t tax deductible.
Your monthly P.I.T.I. (which includes mortgage insurance) is about $1,995 on a $300,000 home with 3% down and a 30-year fixed mortgage at 4%. After tax deductions, this total housing cost drops to about $1,614. And you’d only need $9,000 for the down payment.
Start improving your credit score now
Credit scores are critical for getting the best mortgages with the lowest rates. Lenders want a reliable on-time payment history as well as credit depth. The more lines of credit the better, so renters with only one credit card should consider obtaining more credit. Just note that your credit score can drop 5 to 15 points when you first open a new account, then will come back up when you’ve established a good payment history.
Even the smallest error on your credit report can take 60-days to clear up. That means you need to start NOW! Credit report checks are especially important if you have a common name (like Smith), are a junior or a senior or if you are recently divorced.
As a lender evaluates your financial situation they will determine your debt-to-income ratio as part of their calculations. Decreasing your debt helps in the loan approval process and makes it easier for you to pay your mortgage. Diminishing your debt also helps increase your credit score, which is essential to getting a loan with preferable terms.
If you are interested in getting more information about steps to home-ownership and how to get pre-qualified for a mortgage please contact me today!
Laine Murray - Realtor
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