If you’re searching the internet for resources that help you determine a budget for a home loan, you’re likely to come across a free mortgage calculator that will instantly give you a number.
Typically, all you need to do is plug in a few details right from your computer screen such as interest rate, monthly payment amount and the length of the mortgage, and these online tools calculate the amount you could borrow and the total cost of the mortgage after its completion.
It’s a quick and easy way to get a ballpark figure, although these calculators don’t usually take into account what you can afford based on your income or other home expenses like taxes, interest, insurance, HOA dues and utilities, which are critical when determining a homeowner’s budget.
In fact, these often overlooked costs can amount to almost $10,000 a year, according to real estate marketplace Zillow.
What Is The 50/20/30 Budget Rule?
Here at WEOKIE Federal Credit Union, many of our members ask about the 50/30/20 rule, one of the simplest budgeting tools that can help people who are shopping for a home. The rule allows the budgeter to focus on your larger financial picture by dividing after-tax pay into three types of expenditures: a 50 percent spend for needs, a 30 percent spend for wants and a 20 percent spend for savings or paying off debt. You can then calculate a mortgage budget from your wants and savings/debt expenditures.
One thing to remember is that after-tax pay differs from your take-home pay. Your after-tax pay includes any non-tax deductions like retirement contributions and health insurance.
Setting A Budget For A New Home
Most people feel more at ease setting a specific budget for buying a home. Here’s how to do it.
Calculate a down payment - The standard down payment used to be 20 percent of the selling price, although in the current real estate market, the average U.S. home buyer puts just 12 percent down when buying a house. It’s also a good idea to also budget six months of expenses for emergencies, which will also satisfy lenders that require proof of cash reserves before approving a loan.
Determine a monthly payment - Experts often recommend spending 30 percent and up to 50 percent of your after-tax income on mortgage expenses, which typically include principal, interest, taxes and insurance costs (PITI) as well homeowner association dues if applicable.
Find out your borrowing amount – A loan amount is based on your monthly payment and the rate of interest you pay. The Consumer Financial Protection Bureau has a mortgage calculator that estimates an interest rate based on your credit score, location and the kind of loan you’re considering.
Realize tax break opportunities – For today’s taxpayers, the Tax Cuts and Jobs Act (TCJA) of 2017 places a $10,000 cap on the maximum amount of state and local taxes a taxpayer can write off on tax returns and places a lower limit on how much mortgage interest a taxpayer can deduct. However, the TCJA also doubled the standard deduction for all taxpayers, which should give homeowners a tax cut, too.
Include an after-house-closing budget - After you know you’re ready to apply for a home loan, make sure your budget has room for repairs, maintenance and decorating after you’re in your new home.
A typical annual repair budget is calculated by putting aside 0.5 to 1 percent of your home’s value. Another expense to budget for is heating and cooling your house, which can include installing insulation and exploring different types of utilities based on your location. Decorating is subjective; many homeowners either downsize or expand their furniture and décor to fit their home.
WEOKIE Is Your One-Stop-Shop For Everything Homes
When you’re ready, we have several services and resources to help you find a home (HomeAdvantage offers cash rewards when you buy or sell a home using a group of highly skilled realtors.) We have multiple types of loans and we can even assist you with insurance for home. We want to make every step in your home-buying experience as easy and as affordable as possible. To help with this, we now have an after-hours Mortgage Loan Officer available to assist you.
Complete our online form, or give us a call today at (405) 235-3030 or 1-(800) 678-5363 to discuss your dream home goals.
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