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Understanding The Related Costs of Home Buying
According to Will Rogers, property is a great
investment because nobody's making any more. That is as true today as it
was in the
early 1900s when Will Rogers made the statement. Today, however, you'll
need to think
about more than a mortgage payment to determine if you can afford a home.
To assure
you are purchasing a home within the confines of your budget, you must
consider
closing costs as well. How much can you afford? Coldwell Banker®
professionals provide some insight.
First calculate the estimated mortgage payment
Several formulas exist to help determine how much a lender will allow a
consumer to
borrow. One of the more accurate formulas is a front- and back-end ratio.
It states that
the buyer can afford as much as 28 percent of his or her gross-monthly
income toward
the monthly mortgage payment, assuming that the consumer's other debt
payments
(credit cards, car loans, student loans, etc...) are less than or equal to
8 percent of his or
her gross-monthly income.
To better understand this formula, assume a gross-family income of $5,000
a month. The
front-end ratio or maximum monthly mortgage payment is (28 percent of
$5,000) $1,400.
The back-end ratio is (8 percent of $5,000) $400. Therefore, the buyer can
afford a
$1,400.00 monthly mortgage payment as long as monthly debt payments are
less than or
equal to $400. If debt payments exceed the back-end ratio, it will reduce
the monthly
mortgage payment dollar for dollar. For example, if debt payments are
$500, the maximum
monthly mortgage payment a person could afford would be reduced to $1,300.
The Coldwell Banker® award-winning Web site, www.coldwellbanker.com,
provides
other calculators and tools to help consumers better understand the
mortgage process,
including a mortgage calculator which allows consumers to project monthly
mortgage
payments out to total loan amounts.
Down Payment and Closing Costs
These terms refer to how much money the buyer will have to pay out of
pocket and
up-front to purchase a home. Down payment is simple; it refers to the
amount of money
the buyers needs to invest at closing toward the price of the home. Most
lenders
request a down payment of at least 20 percent of the cost. For first-time
homebuyers,
this may be difficult to achieve. Several programs are available and
relatively easy to
qualify for that allow buyers to make down payments of as little as 3
percent of the price
of the home. Consumers can evaluate their options with the Coldwell
Banker® Mortgage
program or their lender.
Closing costs vary from state-to-state, city-to-city and even from
home-to-home.
Closing costs can include attorney fees, home inspection costs, title
search fees, bank
fees, termite inspection fees and radon inspection fees, to name a few.
The mortgage
lender requires some of these services and others are legally necessary
depending on
where the buyer lives. To better understand the necessary closing costs in
the area they
are looking to buy in, consumers can contact their local Coldwell
Banker office. For the
sake of estimating, closing costs can range from 1 to 5 percent or more of
the value of
the home.
While up-front costs are more than one would pay for renting,
homeownership can still
be a sound investment and certainly an emotionally rewarding experience.
After all, a
cozy home and a piece of land to call your own are as much a part of the
American
landscape as Will Rogers is.
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