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You’re Shopping for a Home the Wrong Way

Even if you haven’t purchased a home yet for yourself, chances are you’ve seen a fair amount of HGTV episodes to get the idea of how it works. Your realtor finds this amazing home that hits everything on your wish list and your offer is accepted! The next thing you know friends and family are over for “demo day”, helping you remove those outdated kitchen cabinets and 1970’s wallpaper. Yuck! But it’s all good, you got a great deal and will knock out this rehab project in a couple of days! It’s a good thing you planned everything according to your home budget…or did you?

Your Home Budget is a monthly payment, not a sales price

 

Before we start talking about knocking down that wall, let’s flashback to the beginning of the home search. Remember the part where the realtor asks about a budget? The answer to this question is usually a sales price limit.  “I don’t want to spend more than $200,000.” If this doesn’t sound odd to you, don’t worry. This is how the majority of americans refer to their home budget with their real estate agent.

So what’s wrong with this?
Glad you asked! Let me ask you something…are you going to be paying cash for the home? If so, nice job mate! Typically, cash buyers make up about 10% of all home purchases each year, which means that the other 90% of us will need to finance this purchase.

Let’s pause for a moment and think about what the word budget means to you.
Here is how Websters defines it: an amount of money available for spending that is based on a plan for how it will be spent

Another way to put this: Money In vs. Money Out

Home Budget

Have you ever wondered why your rent budget is a monthly payment, but a home purchase budget is a sales price? For most people, it’s a normal tendency to reference a sales price as their spending budget. After all, that is what they say on HGTV!
As it turns out, the sales price of the home is really just one piece of the puzzle when it comes to your spending limit. In reality, your mortgage payment is your actual home budget. It always has been and always will be. This is what you will be paying each month. Remember, money in versus money out.

Aren’t All Sales Prices Created Equal?

No, sales prices are not created equal. Homes listed at the same exact sales price can each provide a different total monthly mortgage payment.

Why?

Your total monthly housing payment consists of more than just the principal & interest on the mortgage loan. These additional expenses are commonly referred to as your “escrow” or “other” obligations.

Each property may have different rates for these other monthly expenses:

– Property Taxes
– Homeowners Insurance
– Flood Insurance
– HOA (if applicable)

Each mortgage program may have different rates for these other monthly expenses:

– Interest Rate
– Mortgage Insurance (if applicable)
– Down Payment Requirement

How Come Nobody Knows This?

You’re asking great questions! Actually, your lender knows this, and they always have. They set your spending limit based on the sum of all of these expenses each month. Make no mistake about it, your monthly payment is your true home budget. However communicating this can be pretty challenging when you think about all of the variables that factor into your total monthly housing payment.

Can You Show an Example Please?

To keep things simple, let’s assume that you are only considering one type of mortgage program. For this example, we’ll use an interest rate of 3.75% on a 30yr Fixed Conventional mortgage with a 5% down payment and monthly mortgage insurance.

Remember when we said that Sales Prices are not created equal? This example will show you what we are talking about.
Homes A, B and C all have the same Sales Price of $200,000. Furthermore, the mortgage loan amount on each home will be the same as well, at $190,000.  The principal and interest payment comes to just $880 to borrow this amount.
Now let’s look at each of the home’s “other” expenses to consider.

Total Monthly Home Budget

 

“Other Expenses”
Home A – 

Property Taxes = $2,400
Homeowners Insurance = $50
HOA = $0
Mortgage Insurance = $118 (mo.)
Total Monthly Other = $368

Home B- 
Property Type = $1,200
Homeowners Insurance = $50
HOA = $400 (monthly)
Mortgage Insurance = $118 (mo.)
Total Monthly Other = $668

Home C- 
Property Taxes = $4,200
Homeowners Insurance = $50
HOA = $200 (annual)
Mortgage Insurance = $118 (mo.)
Total Monthly Other = $535

Your Total Monthly Payments:
Home A = $1,248
Home B = $1,548
Home C = $1,415

Big Difference in Affordability

The monthly payment difference between Home A and Home B is a whopping $300!  Your home budget may not work for all three of these homes, despite them sharing the sales price.

“Other” Expenses Far Outweigh Sales Price
For every $1,000 you borrow on a 30yr Fixed Rate mortgage, your principal & interest will vary by approximately $4.63. That’s it!
For every $1,000 variance in any “other”annual expense, your monthly housing expense will vary by $83.33.
This is a ratio of 18:1.
In other words, you could borrow an additional $64,000 for the same $300 monthly payment difference between Home A and Home B, assuming Home B had the same “other” expenses as Home A.
WOW!!

Is There an Easy Way to Compare This While Home Shopping?

Yes, there is a new solution to this age old dilemma! CAN I BUY IT offers an easy way to find out the true monthly cost of your next home. As a middle man between mortgage lenders and real estate websites, you can quickly find out if something is within your home budget range or not.

Is This Any Different?

How is this any different from websites such as Google Mortgage, Lending Tree or any online mortgage calculator? CAN I BUY IT goes well above the standard benchmark, by providing you not only with the total estimated closing costs upfront, but also by factoring in mortgage program specific guidelines. This ensures that you’re getting the right information and seeing the entire picture. The best part is that you don’t need to submit any personal information, and you will not receive any solicitations from lenders. You can contact them if you want to, it’s entirely up to you.

CAN I BUY IT is streamlining the quoting process so you can search and compare homes based on your true budget, which is a combination of your total monthly housing payment and cash for closing. Start making better home financing decisions today at http://www.canibuyit.com.

 

 

 

 

CanIBuyIt
CanIBuyIt is dedicated to informing homebuyers on their financing budgets.

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