When it comes to affording a new home, you have a few types of home loans to choose from. Prospective homebuyers often compare the FHA vs. the conventional loan when researching loans. Each loan type has certain stereotypes associated with them, but we are here to give you the facts about both FHA and conventional loans. This post will help you understand what each loan is, familiarize you with the differences between them, and provide some guidelines for how to pick which one is best for you.
What Is An FHA Loan?
An FHA loan is insured by the Federal Housing Administration (FHA). These loans are issued by private lenders, but lenders are protected from losses by the FHA if the homeowner fails to repay. FHA loans are generally used to refinance or buy a home.
What Is A Conventional Loan?
A conventional loan is supplied by a private lender and isnât federally insured. Requirements for obtaining a conventional loan vary depending on the lender. When used to buy property, conventional loans are typically known as mortgages.
Differences Between FHA and Conventional Loans
The main difference between FHA and conventional loans is whether or not they are insured by the federal government. Conventional loans arenât federally backed, so itâs riskier for the lender to loan money. On the other hand, FHA loans are protected by the government, and as a result of less risk, they can typically offer better deals.
This difference in federal insurance is the reason why FHA and conventional loans vary when it comes to the details of the loan. Keep reading to learn the differences regarding credit requirements, minimum down payments, debt-to-income ratios, loan limits, mortgage insurance, and closing costs.
Minimum Credit Score
Minimum Down Payment
Maximum Debt-to-Income Ratio
Credit score of 500: 43%
Credit score of 580+: 43-50%
Credit score of 620: 33-36%
Credit score of 740+: 36-45%
Contiguous US: $548,250
High-cost counties, AK, HI, and US territories: $822,375
Mortgage insurance premiums required.
Private mortgage insurance required with down payments less than 20%.
Stricter standards, property purchased must be a primary residence.
Flexible standards, property purchased doesnât have to be a primary residence.
Sources: FHA Single Family Housing Policy Handbook | Fannie Mae 1 2 | Federal Housing Finance Agency | Freddie Mac | HUD 1 2 | Consumer Financial Protection Bureau 1 2
Your credit score is a determining factor in your loan eligibility. Your credit score is measured on a scale of 300 (poor credit) to 850 (excellent credit). Good credit helps you get approved for loans more easily and at better rates. FHA and conventional loans differ in their credit score requirements and represent financial options for individuals at either end of the credit spectrum.
Minimum Credit Score for FHA Loan: 500
Accepts a credit score as low as 500, but usually with a 10% down payment
These loans accept lower credit scores because they are insured
Note: Some lenders may only issue FHA loans with higher credit scores
Minimum Credit Score for Conventional Loan: 620
Accepted score may vary from lender to lender
These loans are usually offered to individuals with strong credit because they present less risk to lenders
Minimum Down Payment
A down payment is the sum of money that is paid as a percentage of your purchase up-front.
Minimum Down Payment on an FHA loan:
10% of your purchase with 500 credit score
3.5% of your purchase with 580+ credit score
Minimum Down Payment on a Conventional Loan:
3% of your purchase can be put down with good credit
5% to 20% of your purchase price is typical
Your debt-to-income ratio is the amount of money paid toward debt each month divided by your total monthly income. To be eligible for a loan, you must be at or below the maximum debt-to-income (DTI) ratio.
Maximum DTI Ratio Guidelines for FHA loans:
43% with a credit score of 500
43â50% with a credit score of 580
Maximum DTI Ratio Guidelines For Conventional Loans:
33-36% with a credit score lower than 740
36-45% with a credit score of 740 or higher
50% highest allowed through Fannie Mae
Both FHA and conventional loans have limits on the amount that you can borrow. Loan limits vary based on your location and the year your loan is borrowed. Find 2021 loan limits specific to your county through the Federal Housing Finance Agency.
2021 FHA Loan Limits
High-cost counties: $822,375
Low-cost counties: $356,362
2021 Conventional Loan Limits
Contiguous US (excluding high-cost counties): $548,250
Alaska, Hawaii, US territories, and high-cost counties: $822,375
Mortgage insurance is taken out to protect the lender from losses in case you fail to repay your loan. Whether you will pay private mortgage insurance or mortgage insurance premiums is based on your loan type and down payment percentage.
Mortgage insurance is required for all FHA loans.
It is paid to the FHA in the form of mortgage insurance premiums and includes an up-front and monthly premium.
MIP payments last the entire life of your FHA loan.
To get rid of MIPs after paying 20% of your loan, you can choose to refinance into a conventional loan.
Private mortgage insurance (PMI) is only required when a down payment below 20% is made.
PMI comes in different forms: monthly premium, up-front premium, and split premiums.
PMI requirements stop once you have met one of three requirements:
Principal loan amount is reduced to 80% before the loan term ends.
At least 78% of the principal balance is scheduled to be paid down.
The halfway point of your loan term has passed.
There are different property standards that must be met to use each loan. FHA loans have stricter requirements, while conventional loans have more flexibility.
Property purchased with FHA loans must be your principal residence, meaning the borrower has to occupy the residence
FHA loans canât be used to invest in property (e.g., renting out or flipping)
Title must be in the borrower’s name or name of a living trust
Property purchased with a conventional loan doesnât have to be a principal residence â second or third residences are allowed
Conventional loans can be used to purchase investment properties
Pros and Cons of FHA vs. Conventional Loans
As a result of the various differences between FHA and conventional loans, each type has its respective pros and cons.
Qualify with low credit and high DTI
Smaller down payments overall
More affordable with low credit
Lowest option for down payments with good credit
More affordable with good credit
Property doesnât have to be your main home
Mortgage insurance premiums required for life of loan
Property purchased must be your main home
Need higher credit and lower DTI to qualify
Typically has larger down payments
PMI required with a down payment less than 20%
Pros and Cons of FHA Loans
FHA loans are government-regulated and insured to extend flexible opportunities for homeownership. Theyâre flexible regarding credit and DTI, but stricter about insurance and property standards.
Flexible qualification with low credit and high DTI
Smaller down payments overall
More affordable with low credit
Mortgage insurance premiums required for life of loan
Property purchased must be your primary residence
Pros and Cons of Conventional Loans
Conventional loans can also offer flexibility, but generally only if you have good credit and demonstrate reduced risk to the lender. These loans have stricter qualifications, but flexibility in other areas.
Lowest option for down payments (3% with good credit)
Private mortgage insurance can be canceled (must meet requirements)
More affordable with good credit
Property purchased doesnât have to be a primary residence
Strict qualifications require higher credit and lower DTI
Larger down payments are typical
Private mortgage insurance required with a down payment less than 20%
Which Loan Is Better For You?
Both FHA and conventional loans have their advantages and disadvantages. Here are some general guidelines for when to use an FHA loan or a conventional loan.
When To Use an FHA Loan
You have a low credit score (500â619)
Your DTI ratio is on the higher side (between 45â50%)
You can only afford a small down payment
You plan to use the property as your primary residence
When To Use a Conventional Loan
Your credit score is fairly good (620 or above)
Your DTI ratio is on the lower side (33â36%)
You can afford a larger down payment
You want flexibility with insurance and repaying your loan
Itâs important to thoroughly research your options before choosing a loan. A key takeaway when comparing FHA vs. conventional loans is that FHA loans are federally insured and conventional loans arenât. This distinction results in different qualification and payment requirements for each loan.
Use the information in this post to carefully compare the differences in accepted credit scores, minimum down payments, loan limits, maximum debt-to-income ratios, mortgage insurance and property standards. In doing so, choose the loan that works for your circumstances and helps you best afford the home of your dreams.
Sources: FHA Single Family Housing Policy Handbook | US Dept. of Housing and Urban Development | Federal Housing Finance Agency | Freddie Mac
The post FHA vs. Conventional Loans: Which Is Better? appeared first on MintLife Blog.
Mortgage interest rates dropped dramatically over the summer, to the point where home loans have never been cheaper in most of our adult lifetimes. With rates at historic lows, you mightâve considered taking advantage of them, either by purchasing a new home or refinancing your current mortgage.
Recent figures from Freddie Mac show that mortgage refinances surged in the first quarter of 2020, with nearly $400 billion first home loans refinanced. However, as it turns out, refinancing your mortgage might actually be more expensive than purchasing a new home.
This surprised us, too â why would there be a difference at all?
We investigated how refinancing rates and new purchase home loan rates are set, and found several reasons for this rate disparity. On top of the rate difference, mortgage refinancing is even more difficult to qualify for, given the current economy.
Refinancing your existing mortgage can absolutely make sense in terms of interest savings, but donât rule out buying a new home instead.
Before rushing to refinance your home, read on to gather the information you need to make the right financial decision for your situation.
Pandemic Effects on Home Lending
Just as mortgage rates have stumbled, banks and lenders have tightened the screws on borrowers due to COVID-19, requiring higher credit scores and down payment amounts. Chase, for example, raised its minimum FICO score requirements for home purchases and refinances to 700 with a down payment requirement of at least 20%.
Low rates have also driven a massive move to mortgage refinances. According to the same Freddie Mac report, 42% of homeowners who refinanced did so at a higher loan amount so they could âcash out.â
Unfortunately, homeowners who want to refinance might face the same stringent loan requirements as those who are taking out a purchase loan. Mortgage refinance rates are also generally higher than home purchase rates for a handful of reasons, all of which can make refinancing considerably less appealing.
How Refinance Rates Are Priced
Although some lenders might not make it obvious that their refinance rates are higher, others make the higher prices for a home refinance clear. When you head to the mortgage section on the Wells Fargo website, for example, it lists rates for home purchases and refinances separately, with a .625 difference in rates for a thirty-year home loan.
There are a few reasons why big banks might charge higher rates to refinance, including:
Added Refinance Fees
In August of 2020, Fannie Mae and Freddie Mac announced it was tacking on a .5% fee on refinance mortgages starting on September 1. This fee will be assessed on cash-out refinances and no cash-out refinances. According to Freddie Mac, the new fee was introduced âas a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty.â
By making refinancing more costly, lenders can taper the number of refinance loans they have to process, giving them more time to focus on purchase loans and other business.
Lenders Restraining New Application Volume
Demand for mortgage refinancing has been so high that some lenders are unable to handle all requests. Reluctant to add more employees to handle a surge that wonât last forever, many lenders are simply limiting the number of refinance applications they process, or setting additional terms that limit the number of loans that might qualify.
Also note that some lenders are prioritizing new purchase loans over mortgage refinance applications since new home buyers have deadlines to meet. With the housing market also on an upswing in many parts of the country, many major banks and lenders simply canât keep up.
Rate Locks Cost Money
Generally speaking, it costs lenders more to lock the rate for refinance loans when compared to purchase loans. This is leaving lenders disinterested in allocating resources on the recent surge in mortgage refinance applications.
This is especially true since many refinancers might lock in a rate with one provider but switch lenders and lock in a rate again if interest rates go down. Lenders exist to turn a profit, after all, and it makes sense they would spend their time on loans that provide the greatest return.
Tighter Requirements Due to COVID-19
According to the Brookings Institute, Fannie Mae and Freddie Mac have been asking lenders to make sure any disruption to a borrowerâs employment or income due to COVID-19 wonât impact their ability to repay their loan.
Many lenders are also increasing the minimum credit score borrowers must have while making other requirements harder to meet. As an example, U.S. Bank increased its minimum credit score requirement to 680 for mortgage customers, and it also implemented a maximum debt-to-income ratio of 50 percent.
This combination of factors can make it difficult to save as much money with a refinance, or to even find a lender thatâs willing to process your application. With this in mind, run the math and to see if refinancing is right for your situation before contacting a mortgage lender.
Related: The Best Mortgage Refinance Companies
How Mortgage Purchase Rates Are Priced
Mortgage purchase rates are priced using a similar method as refinance rates. When you apply for a home mortgage, the lender looks at factors like your credit score, your income, your down payment and your other debt to determine your eligibility.
The overall economy also plays a giant role in mortgage rates for home loans, including purchase loans and refinance loans. Mortgage rates tend to go up during periods of speedy economic growth, and they tend to drop during periods of slower economic growth. Meanwhile, inflation can also play a role. Low levels of inflation contribute to lower interest rates on mortgage loans and other financial products.
Mortgage lenders can also price their loans based on the amount of business they have coming in, and whether they have the capacity to process more loans. They might lower rates to drum up business or raise rates when theyâre at or nearing capacity. This is part of the reason rates can vary among lenders, and why it always makes sense to shop around for a home loan.
Many people believe that the Federal Reserve sets mortgage rates, but this is not exactly true. The Federal Reserve sets the federal funds rate, which lenders use to ensure they meet mandated cash reserve requirements. When the Fed raises this rate, banks have to pay more to borrow from one another, and these costs are often passed on to consumers. Likewise, costs can go down when the Fed lowers the federal funds rate, which can mean lower costs and interest rates for borrowers.
Related: What Are The Best Mortgage Rates Today?
The Bottom Line
Refinancing your existing mortgage can absolutely make sense in terms of interest savings, but donât rule out buying a new home instead. Buying a new home could help you save money on interest and get the space and the features you really want.
Remember, there are steps you can take to become a more attractive borrower whether you choose to refinance or invest in a new place. You canât control the economy or the Federal Reserve, but you have control over your personal finances.
Improving your credit score right away, and paying down debt to lower your debt-to-income ratio are just a couple of strategies to start. And if youâre planning on buying a new home, make sure you save a hefty down payment amount. These steps help you improve your chances at getting the best rates and terms whether you choose to move or stick with the home you have.
Keep Reading: Steps to Take Before Refinancing Your House
The post Why Refinance Rates Are Higher Than Purchase Loan Rates appeared first on Good Financial CentsÂ®.
Working from home has its perks. Thereâs the money saved from skipping the commute, and just think about all of that time you get back by avoiding crowded freeways or public transit during rush hour. As far as workplace attire goes, few employees would trade âwork-from-home casualâ for dress slacks.
But while working from home affords some new freedoms, it also creates new challenges. One of your biggest tasks is to create a productive, ergonomically correct workplace in your home without breaking the bank. If this sounds familiar, youâre probably asking yourself, âHow can I set up a home office on a budget?â
Whether youâve always worked from home as a freelancer or started during the pandemic, these expert tips will help you get started as you design your home office on a budget:
Strive for an ergonomically correct home office
Being home all day creates an unexpected obstacle: pain. Many workers find that transitioning from a well-equipped office to a makeshift setup at home leads to discomfort. Thatâs because many of them go from having a spacious desk, comfortable chair, and monitor and keyboard in their office building to working from a laptop in their living room.
If you suffer from neck pain or eye strain when working from home, you may be feeling the effects of poor ergonomics. Ergonomics, commonly known as the science of work, aims to optimize productivity and health in a workspace.
As a physical therapist with more than 25 years of experience, Karen Loesing, owner of The Ergonomic Expert, knows this issue all too well. Loesingâs company performs ergonomic assessments for businesses and home offices. Over the years, she has seen countless clients suffering from neck, back or other health issues due to poorly designed workspaces. But it doesnât have to be that way, Loesing says.
âHaving an ergonomically correct workstation enhances productivity and generally overall happiness at work.â
There are relatively easy ways to transform an ergonomic nightmare into a well-functioning home office on a budgetâeven if youâre stationed at the kitchen table, she says. And the investment is worth it.
âHaving an ergonomically correct workstation enhances productivity and generally overall happiness at work,â Loesing says. âFor those who are able to designate a certain space in their home where they can work without distractionsâmaybe even a window with a view and the flexibility to work at your own paceâit has been proven this makes for a happier employee.â
Who doesnât want to boost their health, productivity and happiness in one fell swoop?
Find the optimal location for your at-home workspace
When setting up a home office for remote work, location should be your first decision, says design consultant Linda Varone, author of âThe Smarter Home Office.â Depending on your living situation, there may be an obvious answer, such as that spare room youâve always thought could become an office space.
If you donât have a dedicated office, donât despair. While you design your home office on a budget, think creatively about where it can be.
Varone once visited a clientâs home to help reconfigure her workspace. The client was running a business from a table in the hallway. âAt the end of each workday, she had to pack everything up and store it in the closet in the guest room,â Varone says.
But as Varone learned, guests only stayed over two weeks a year, leaving the room empty the rest of the time. It hadnât occurred to the business owner, but turning the guest room into a home office for most of the year was the perfect solution.
âThere are some simple, simple ways that people can rethink their home office without a big investment and make that space really work for them,â Varone says.
In addition to using a guest room, a dining or living room can also function as a home office on a budget.
Establish the ideal setup for your workstation
Once youâve decided on the room, determine the location for your workstation, Varone says. As you plan your home office, consider placing your desk or table near a window, allowing for natural light and an occasional glimpse of nature. Donât face directly outside; instead, aim for a line of sight thatâs perpendicular to the window, Varone says. Thatâs because, even on an overcast day, youâd be looking into too much bright light if youâre facing the window.
âWhatâs happening is your eyes are adjusting back and forth between the bright sunlight that youâre facing and the darker light of your computer screen,â Varone says. âAnd that ends up being really fatiguing for the eye.â
If you live with others, the biggest challenge will be privacy. Try to clearly define the boundaries of your âofficeâ if you can, such as with an area rug, she says. Then ask your roommates or family members not to enter your space while youâre working, apart from an emergency.
If you use a multipurpose space, be sure to tidy everything up at the end of the day, Varone says. Taking the 10 minutes or so to clean up your âofficeâ will reduce clutter. Ultimately, a clutter-free space can reduce your stress and boost your productivity.
âThat also has a benefit of becoming a little ritual and helping you say, âAll right, my workday is over,ââ Varone says. ââNow I can focus on my personal life.ââ
Choose your furniture wisely
Now that youâve found the perfect location for your home office on a budget, focus on finding the perfect work surface. Maybe itâs a traditional desk. Or it could be your dining room table or kitchen counter.
If you do need to buy a desk or chair, donât feel like you need to spend a fortune. Try looking for a used office furniture store or liquidator in your area, Varone recommends. You could even try searching online marketplaces for a gently used model.
When planning a home office and considering your work surface, what matters most is the height.
The average desk is 29 inches high, Loesing says. This will likely accommodate someone whoâs 5â8â, she acknowledges, but for everyone else? It will take some adjusting to make it fit for them.
Thatâs where your chair comes in. Most people donât need a high-end office swivel chair to work comfortably. As long as you can adjust the height of your chair to fit you and your desk, youâll have a comfortable setup.
Itâs important to adjust the height of your chair to achieve a neutral position, Loesing says. If you donât have the instructions from the manufacturer on how to adjust your model, try searching for videos online, she adds.
One more chair takeaway from Loesing?
âIf you canât spend a dime, at least get as comfortable as you can where youâre sitting, and sit all the way back in your chair,â Loesing says. âWhen you donât sit so your back is against the backrest, youâre using your back muscles all day long instead of them being at rest.â
Adjust your furniture and equipment
As you continue planning a home office, youâll likely find that your computer is your most important piece of equipment. But it can also lead to neck strain. Whether itâs a laptop or an external monitor, Loesing says screen placement is key. In fact, she says itâs the single most important feature to addressâas well as the most commonly disregarded one.
While you plan your home office, Loesing recommends keeping the following ergonomic guidelines in mind to help avoid neck strain:
Align your monitor so your eyes are level with the screen. (Thatâs typically about 4â from the top of the monitor.)
Place your feet flat on the floor and your knees at about a 90-degree angle with the ground.
Place your arms at about a 90-degree angle from the writing surface so your shoulders are relaxed.
If you only have a laptop, and no monitor, you still have options for raising your screen to eye-level. âThere are budget-friendly laptop risers on the market,â Loesing says. âIf you donât want to spend any money, you can place books or reams of paper to bring the screen up to eye level.â
When setting up a home office for remote work and thinking about your arm placement, note that Varone is a strong advocate for an external keyboard. If youâre working at a desk that has a keyboard tray built into it, thatâs a great way to keep your arms at about a 90-degree angle, she says. If you donât have a built-in tray, she says you can improvise by placing your keyboard on an inexpensive laptop table situated directly under your desk.
While the exact adjustments will vary depending on your equipment, height and budget, the focus is on acquiring a neutral position or a position where thereâs no strain on anything, Loesing says.
âWith the addition of standing desks, which encourage movement, employees often find they have significantly more energy at the end of the day.â
Stand if it suits you
If youâre intrigued by the idea of a standing desk, youâre not alone. Standing desk sales have soared over the last decade, buoyed by reports of the dangers of too much sitting.
âStatic postures (e.g., sitting all day in front of a computer) present more fatigue than dynamic working,â Loesing says. âWith the addition of standing desks, which encourage movement, employees often find they have significantly more energy at the end of the day.â
You donât have to buy an official standing desk to reap the benefits when planning a home office. âThe least expensive way would be to take a laptop and place it up high on a built-in high counter using a compact wireless keyboard and mouse,â Loesing says.
Even if you donât have a standing deskâmakeshift or otherwiseâyou can still incorporate movement and circulation into your workday. Set a timer to remind you to stand up and stretch every 20 minutes, Loesing suggests.
For an even better boost, combine this with a popular guideline known as the 20-20-20 rule. Every 20 minutes, give your eyes a break by looking out a window at something at least 20 feet away, and do so for at least 20 seconds.
Donât forget the ambience and accessories
Your desk, chair and computer are the major players when youâre setting up a home office for remote work. But there are a few additional items to consider, like lighting, plants and sound.
Your overhead light fixture likely isnât enough, as it will create shadows and can be too weak by the time it reaches your workspace, Varone says. She recommends investing in a table lamp that creates a wider spread of light in your area. Pick one with a translucent shade that will softly diffuse the light and make it easier on your eyes.
As youâre planning your home office, Varone also recommends incorporating a potted plant or flower into your workspace. Not only can it help purify the air and boost your mood, a natural element can contribute to a restful atmosphere.
Working from home means working with home noisesâespecially if youâre in an environment with roommates, a partner or little ones. To keep the noise down, consider noise-canceling headphones for a quieter workspace and clearer meetings. Other budget-friendly options? Try placing a towel under the door to block out noise from other rooms, Loesing says. Consider curtains instead of blinds, since theyâre better at blocking out sound. Even pillows or large cushions can help reduce noise, she adds.
After youâve taken care of the essentials and if you have the space and money, think about adding a reading chair to your home office. You can use this as a space to review documents or do some deep thinking, Varone says. It can be a welcome respite from your desk while keeping you in the office area, she adds.
One last tip? Add a personal touch, whether itâs a framed family photo or a souvenir from your travels. Itâs your home office, after all. Let your personality shine.
Set up a home office for remote work that allows you to thrive
Now that you know how to create a home office on a budget, youâre ready to make a space that works well for you. Whether youâre an experienced remote worker or a newbie, you can apply these expert tips to set up an office thatâs functional and keeps you motivated day in and day out.
Ready to break in your new home office? Keep that motivation going by learning how to increase your earning potential this year.
The post Planning a Home Office? Check Out These Budget-Friendly Tips appeared first on Discover Bank – Banking Topics Blog.
One of the most exciting parts of becoming an adult is moving out of your old place and starting your own life. However, as is the case with most major life events, moving out comes with a lot of added responsibility. Part of this duty is knowing and understanding your budget when shopping for the perfect apartment, condo, duplex, or rental house. So how much should you really spend on rent?
The 30 Percent Threshold
The first step in deciding how much you should spend on rent is calculating how much rent you can afford. This is done by finding your fixed income-to-rent ratio. Simply put, this is the percentage of your income that is budgeted towards rent.
As a general rule of thumb, allocating 30 percent of your net income towards rent is a good place to start. Government studies consider people who spend more than 30 percent on living expenses to be âcost-burdened,â and those who spend 50 percent or more to be âseverely cost-burdened.â
When calculating your income-to-rent ratio, keep in mind that you should be using your total household income. If you live with a roommate or partner, be sure to factor in their income as well to ensure youâre finding a rent range thatâs appropriate for your income level.
If youâre still unsure as to how much rent you can afford, consider an affordability calculator. Remember to consult a financial advisor before entering into a lease if youâre unsure if youâll be able to make rent.
Consider the 50/30/20 Rule
After youâve set a fixed income-to-rent ratio, consider the 50/20/30 rule to round out your budget. This rule suggests that 50 percent of your income goes to essentials, 20 percent goes to savings, and the remaining 30 percent goes to non-essential, personal expenses. In this case, rent falls under âessentials.â Also included in this category are any expenses that are absolutely necessary, such as utilities, food, and transportation.
Letâs consider a hypothetical situation in which you make $4,000 per month. Under the 50/20/30 rule with a fixed income-to-rent ratio of 30 percent, you have $2,000 (50 percent) per month to spend on essential living expenses. $1,200 (30 percent) goes to rent, leaving you with $800 per month for other necessary expenses such as utilities and food.
Remember to Budget for Additional Expenses
Now that youâve budgeted for rent and essential utilities, itâs time to make a plan for how youâre going to furnish your apartment. One of the biggest shocks of moving out on your own is how expensive filling a home can be. From kitchen utensils to lightbulbs and everything in between, it can be pricey to make your space perfect.
For the most part, furniture falls under the 30 percent of personal, non-essential expenses. Consider planning ahead before a move and saving for home goods so that you donât go into major debt when it comes time to move out.
Be on the Lookout for Savings
If your budget is slightly out of reach for your dream apartment, try to nix unnecessary costs to see if you can make it work. Look for ways to cut down on utilities, insurance, groceries, and rent.
Utilities: Water, heat, and electricity are all necessities, but your TV service isnât. Cut the cord on TV and mobile services that may not serve you and your budget anymore. Consider swapping out your light bulbs for eco-friendly and energy-efficient light bulbs to cut down your electric bill.
Insurance: Instead of paying monthly renters insurance rates, save a fraction of the cost by paying your yearly cost in full. If you have a roommate, ask to share a policy together at a premium rate.
Groceries: Swap your nights out for a homemade meal. You can save up to $832 a year with this simple habit change. When grocery shopping, add up costs as you shop to ensure your budget stays on track.
Rent: One of the best ways to save on rent is to split the bill. Consider getting roommates to save 50 percent or more on your monthly rent.
A lease is not something to be entered into lightly. Biting off more rent than you can chew can lead to unpaid rent, which can damage your credit score and make it harder to find an apartment or buy a home in the future. By implementing these best practices, youâll hopefully find a balance between finding a place you love and still having room in your budget for a little bit of fun.
Sources: US Census Bureau
The post How Much Should You Spend on Rent? appeared first on MintLife Blog.
Being a homeowner on a budget is nothing to be ashamed of, if anything, most people prefer to keep their expenses low, especially after recently purchasing a home! But,there are some things you shouldn’t cheap out on, and we’ve got you covered.
The post 5 Things You Should Pay Premium for as a Homeowner or Renter appeared first on Homes.com.
The internet is a treasure trove when it comes to finding information that can help you buy your first home. Unfortunately, searching for âHow much house can I afford?â will mostly lead you to online calculators that use an algorithm to come up with a generic estimate.
To come up with a figure, these calculators ask you for details like your zip code, your gross annual income, your down payment amount, your monthly liabilities, and your credit score. From there, they come up with an estimate of your debt-to-income ratio (DTI), or the amount of bills and liabilities you have in relation to your monthly income.
The truth is, most lenders prefer your debt-to-income ratio to be at 43 percent or lower, although some lenders may offer you a loan with a DTI slightly above that.
Either way, the figures these calculators throw at you are a simple reflection of what a bank is willing to lend you â not an estimate of what you really can or should spend.
Let’s dig in a bit more to what factors to consider.
Factors that Should Impact Your Home Purchase Price
One of the main factors to consider when deciding how much to spend on a home is how much you want to pay for your mortgage each month. What kind of payment can you commit to without sacrificing other goals?
A mortgage payment calculator is a good tool to use in this case. With a mortgage calculator, you can see how much your monthly payment might be depending on the amount you borrow, the interest rate you qualify for, and the term of the loan.
While you decide on a monthly payment you can live with, there are additional details you should consider. The main ones include:
Down Payment: If youâre able to put down 20% of your home purchase price, you can avoid private mortgage insurance, or PMI. PMI adds an additional cost to your mortgage each month (usually around 1% of your loan amount), although you can have this charge removed from your loan once you have at least 20% equity.
Property Taxes: Find out the annual property taxes for any home youâre considering, then divide that amount by 12 to figure out approximately how much youâll need to pay toward taxes in your mortgage payment each month. Also remember that your property taxes will likely go up slowly over time, which will increase your monthly housing payment along the way.
Homeowners Insurance: Your homeowners insurance premiums will also vary depending on the property and other factors. Make sure to get a homeowners insurance quote so you know approximately how much youâll pay for coverage each year.
Home Warranty: Do you want a home warranty that will repair or replace major components of your property that break down? If so, youâll want to price out home warranties that can provide coverage for your HVAC system, plumbing, appliances, and more.
Other Monthly Bills: Take other liabilities you have into account, and especially the big ones. Daycare expenses, college tuition, utility bills, car payments, and all other bills you have should be considered and planned for.
Financial Goals: Are you trying to save more than usual so you can retire early? Or, are you saving in a 529 plan for future college expenses? If your financial goals are a priority (as they should be), then youâll want to make sure your new house payment wonât make saving for other goals a challenge.
Upgrades and Repairs: Finally, donât forget to come up with an estimate of how much you might want to spend on repairs or changes to your new home. A property that is new or move-in ready may not require much of anything, but money you plan to spend on a major renovation should be taken into consideration along with the purchase price of your home.
Hidden Expenses to Plan For
The factors you should consider when figuring out how much home to buy are pretty obvious, but what about all the expenses of homeownership you canât always plan for? The reality is, you will need to do some work on your home at some point, and many of the most popular repairs can cost tens of thousands of dollars on their own.
These repair and renovation cost estimates from Remodeling Magazineâs 2020 Cost vs. Value study are just a few examples:
Garage door replacement: $3,695
Vinyl siding replacement: $14,459
Wooden window replacement: $21,495
Asphalt roof replacement: $24,700
In addition to major repairs like these, youâll also have repair bills for your HVAC system, mulch to buy for your flower beds, and ongoing costs for maintenance and upkeep to pay for. You may also decide to remodel your older kitchen one day, or to add an extra bedroom as your family grows.
As you figure out how much you should spend on a home, remember that you wonât know exactly how much youâll need for home repairs or upgrades. Most people set aside some money for home maintenance in their emergency fund, but you can also set aside money for home repairs in a separate high-yield savings account.
How to Calculate How Much House You Should Afford
All of the costs weâve outlined above probably seem overwhelming, but keep in mind that most major home repairs will be spread out over the years and even decades you own your home. Not only that, but you will hopefully start earning more over the course of your career. As your paycheck grows, youâll be able to set aside more money for emergencies and potentially even pay your mortgage off faster.
So, how do you calculate how much house you can afford? Thatâs really up to you, but I would start by tallying up every bill you have to pay each month including car payments, insurance, utilities, student loans, and any other debts you have. From there, add in some savings so you have money to set aside for your investing and savings goals. Also factor in money you set aside for retirement in a workplace account.
At this point, you could consider other factors that might impact how much you want to pay for a home. For example:
Do you need to build an emergency fund?
Are children on the agenda, and should you play for daycare expenses?
Do you like being able to save more money for a rainy day?
Do you want to have one spouse stay at home in the future?
How long do you want to pay off your home loan?
Once youâve considered all other factors, you may decide that you should set aside money for some other goals, like future daycare bills or college savings. Maybe you decide you want to pay double on your student loans so you can pay them off early, or that you want a 15-year-home loan with a larger monthly payment instead of a traditional 30-year loan.
Either way, experts tend to agree that your mortgage payment should be no more than 25% of your income. For a $7,000 monthly income, that means your payment shouldnât exceed $1,750. If your income is $5,000 per month, your monthly payment should be no more than $1,250 per month. These are ballpark estimates, and your property taxes and homeowners insurance premiums (or estimates) should also be figured into this amount.
What to Do If You Already Spent Too Much?
If you already overspent on your home, youâre probably wondering which steps to take next. Maybe your monthly mortgage payment is making it impossible to keep up with other bills, or perhaps the home you bought required a lot more work than you realized.
Either way, there are some steps to get back on track financially if you bit off more than you can chew. Consider these options:
Refinance your mortgage. Todayâs incredibly low rates have made it so almost anyone can refinance an existing mortgage and save money these days. If youâre able to qualify for a new mortgage with a lower interest rate, you could lower your monthly payment and save money on interest each month. Compare mortgage refinancing rates here.Â
Cut your expenses. Look for ways to cut your spending on a daily basis â at least until you figure out what to do in the long run. Figure out areas of your budget where you might be spending more than you realized, such as dining out, getting takeout, or going out on the weekends. If you can cut your monthly spending somewhat, you can find more money to use toward your mortgage payment each month.Â
Get a roommate. Consider renting out your guest room in order to get some help with your mortgage. If you live in a tourist area, you can also rent out a space using platforms like Airbnb.com or VRBO.com.Â
Sell your home and move. Finally, consider selling your home and moving if you have enough equity to do so without taking a financial loss. Sometimes the best thing you can do in a financial crisis is cut your losses and move on.
The Bottom Line
How much house you can afford isnât always the same as how much you should afford. Only you know what your monthly bills and liabilities look like each month, and only you know the goals and dreams you really should be saving for.
When it comes to buying a home, youâre almost always better off if you err on the side of caution and borrow less a bank will lend. Buying a modest home can leave you with a lot more choices in life, but buying a home you canât really afford can leave you struggling for years to come.
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