Everyone has one. Whether you keep track of it or even acknowledge it from day to day, we all have a budget. Sure it might not be written down and strictly followed, but we all know what we’re comfortable spending on a given purchase no matter the size. Budgets reflect a reality that we either work within happily or despise. If your budget is reflecting the fact that, you can afford to make a given mortgage payment every month, but it will be tight, you have some tough decisions to make.
Those decisions include the obvious, such as putting off the purchase until you either reduce other current revolving debt, generate more income or increase those savings. Another way to accomplish a purchase while not feeling tight in the ”back pocket,” so to speak, is to consider buying a less expensive home. One that won’t crimp your budget and cash flow each month! Let’s take a look at some possible less than obvious ways to take the money you have and stretch those dollars to make the purchase a bit more comfortable.
Pay it forward – so to speak
Whether you’ve heard the terms as PMI (private mortgage insurance) or MIP (FHA mortgage insurance premium), it’s an add on to your monthly mortgage payment that you would be wise to try to avoid.
Required on all mortgages for which the borrower makes a down payment of less than 20 percent, PMI can add a chunk to your monthly house payment.
Using national averages as an example, if we look at a 30-year, FHA loan at a rate of 3.75% to purchase a home for $250,000, providing the required down payment of $8,750, your MIP will be about $170.00.
Conversely, by taking the time to save for a larger down payment so that you can pay a 20% down payment, and this will cause you to be able to forego that MIP or PMI fee each month. That can allow you to pocket that $2,040 per year savings to much better use than handing it over to the lender.
Here’s the other half of that scenario. Purchasing a home with a 20% down payment, because the loan amount is smaller, your monthly payment will be much less as well. In our scenario you’d save nearly $500 per month on your mortgage payment!
“Okay that’s all well and good,” you might say, “but who wants to wait as long as it will take to save all that money?” I hear you! One way you can obtain those down payment dollars is a gift. Is there anyone that will gift you the funds for the down payment?
While FHA requires that the borrower put down at least the 3.5% down payment, conventional loan guidelines allow “gift” funds for all or part of the down payment. This means as long as the loan-to-value will be 80 percent or less – meaning you’ll need a 20 percent down payment – you escape PMI!
The catch is that the giver of the funds has to be related to you, a domestic partner or fiancée.
Building sweat equity
Ok, but this is the real world and most of us do things like “live,” so not all of us can come up with a 20% down payment, yet we need a place to call home! To raise a family! Hey, it still beats renting in a lot of markets even with PMI factored into your payment!
For those on a limited budget with less in savings, buying a fixer-upper may be the answer! Nationwide, fixer-uppers are priced an average of 8% less than market value, according to a Zillow analysis.
The downside to buying a home that needs work is that, since you have a tight budget, renovation projects will on an “as you can afford to make repairs” basis. Some buyers are okay with this kind of game plan, especially if the work is mostly cosmetic.
If you are among those buyers that has the vision, stamina, and will to attack a project, fixer-uppers are an ideal way to get into homeownership for a lot less money than you’d pay for a “move-in ready” home. Eventually, you will have a home that’s customized to your style and design!
Then once you are at a 20% equity threshold you could refinance your home, and through natural appreciation along with any improvements you’ve made, you could move into a conventional mortgage and drop FHA and the associated PMI payment. In fact, in this scenario once you hit that 20% equity threshold, you could drop PMI in a refinance potentially “faster” than if you’d waited to save up the 20% down to make that purchase to begin with. Think about it that way.
One note, FHA has a 203k arm of that loan where you can get money for renovation and update projects tied into your FHA loan. The rate is a little higher, but you’d have the money to put into the house financed at today’s low rates and within a few short weeks of closing you’d have that additional equity in an updated home to move into! With that said, there are limitations and best to consult with your lender about how an FHA 203k loan might work.
What else is in my payment?
There are several pieces and parts to your monthly mortgage payment and a portion of your payment goes into an escrow account with your mortgage company to pay for your insurance and taxes.
One thing you’ll have to do when buying a home is get a quote and select your homeowner’s insurance. The average annual premium, nationwide, is just under $1000, according to Value Penguin. The Insurance Information Institute offers several ideas and tips on how to whittle down the cost of homeowner’s insurance.
A few common ideas, accepting a higher deductible, installing security features and taking advantage of discounts, such as those for seniors or multi-policy discounts. It’s therefore always a smart idea to contact the company that has your automobile insurance first!
Wallet Hub’s John S Kiernan claims, “The average American household spends $2,149 on property taxes.” That’s a bit more than $179 per month.
Interestingly enough, but I still see a few homebuyers who don’t think to research or ask about a home’s property taxes before deciding to purchase. It’s easy to do – many assessor’s offices have tax information online. Easier than that, your real estate agent can look that up for you in minutes.
“Buyers also should find out whether a home may be subject to multiple property tax authorities. Not only states, but also counties, cities and special districts, such as local water, sewer or school authorities, may wield such powers,” according to bankrate.com’s Marcie Geffner.
While a limited budget and small savings don’t preclude someone from buying a home, finding ways to stretch those dollars you have may allow you to purchase more home than you thought possible. At the very least, investigating cost-saving measures and opportunities will help lower your monthly payment.