How Much Can I Afford?
Purchasing a house is a big decision. Whether you choose a 15 or 30-year loan, it’s a decision you’ll live with for a long time. That’s why we pulled together a few resources to help you know exactly how much you can afford.
Finding an ideal home buying budget
Deciding how much you can afford for a home is a personal decision. It depends on your income level, debt load, life stage and other spending habits. Don’t expect to have the same budget as other first-time home buyers you watch on TV. Do expect to pay about 30% of your income on a home. Any more than that can make it challenging to have the cash for things like renovations, vacations or new cars.
Principal loan balance
The principal loan balance is the outstanding amount that remains to be repaid on a loan. It represents the initial amount borrowed minus any repayments made towards the principal. As borrowers make monthly payments, a portion goes toward reducing the principal balance, while another portion covers interest charges. Over time, as more principal is paid off, the loan balance decreases, eventually reaching zero at the end of the loan term, assuming all payments are made on schedule.
Annual interest rate
For a borrower, the annual interest rate represents the cost of borrowing money and is a critical factor in determining the total loan cost. A higher interest rate translates to higher monthly payments and a more extended loan term. A lower interest rate can make monthly payments more affordable and lead to a decreased overall loan cost. Therefore, it is essential to pay attention to the annual interest rate provided by a lender while choosing a loan option and to shop around to find the best rate available.
The amortization length, or loan term, is simply the time in which you must repay the loan. Common loan terms are 15 or 30 years; however, you can always make extra payments, called prepayments, to pay off your loan earlier and reduce the amount of interest you need to pay. Generally, a shorter amortization length results in a higher payment, and a longer amortization length results in a lower payment. When you have a longer amortization length, your payment may be lower, but you will pay more interest over the term of the loan.
When buying a home, it is important to be aware of additional fees and expenses beyond the purchase price. One significant cost to consider is closing costs. These are the fees paid at the closing of a real estate transaction and typically range from 3% to 6% of the purchase price. These fees cover the legal and administrative costs associated with transferring ownership of the property. Being prepared for these additional costs will ensure a smooth home buying process and prevent any financial surprises.
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