Assessing whether you can afford to buy a home

Victor Polich
Posted by Victor Polich
Mortgage Banking

Buying a home is an exciting step, but if you’re thinking about taking the plunge, how does your budget look? Home-buying means not only a large initial investment and an ongoing mortgage payment, but many other expenses, too. So it’s time to figure out your numbers.

Two men looking at tablet, also near a laptop, assessing a financial question.A good first step is to analyze your monthly expenses and prepare a detailed monthly budget. There are many online money management tools that will help you understand how much you spend in various categories, and they are easy and fun to use. Bank of the West’s calculators are available here.

To make the most informed decision on whether to purchase, it’s important to take a holistic look at the financial implications of home ownership. From closing costs to the price of repairs, all of these need to figure in your budget. Here are 6 costs to consider:

1. The down payment is the portion of the purchase price of a property that you will be paying upfront. A good starting point is 20% of the purchase price, but percentages can vary.

2. Closing costs are the total of all expenses related to your new mortgage that must be paid at closing. Expect these costs to range generally from 1.5% to 5% of the mortgage amount—depending on your location and the type of mortgage.

3. Your monthly mortgage payment will likely loom large in your budget. Each mortgage payment typically includes both the repayment of a portion of the principal (the amount you borrowed) and the interest (a fee for using the lender’s funds), unless you have chosen an interest-only product. Your monthly payment will depend on the amount borrowed, the interest rate, the repayment period, and whether you have a fixed rate or adjustable rate mortgage.

4. It’s important to remember that the monthly payment is only part of your ongoing costs. Taxes and insurance might include property taxes, homeowner’s insurance, and other annual fees. The lender may hold these additional funds in a separate escrow account and then pay bills on your behalf to ensure these annual expenses are paid on time.

5. Don’t forget settling-in costs, which help make your new home your own. This includes purchasing new furniture and appliances, cleaning and refurbishing, or upgrading and repairing items in your home.

6. Remember also additional ongoing expenses, which include utilities (oil, gas, electricity, and water) and maintenance costs. Keep in mind the amount you’ll pay for utilities can vary greatly, and repairs are often unexpected. It’s important to keep a savings nest-egg to help you cope with any nasty surprises.

Good budgeting can help you enjoy your new home, rather than sit there worrying about how you’ll pay for it all. If you’re thinking about buying, take time to analyze your spending habits and commitments, and be aware of the holistic picture of what it really costs to buy that dream home.

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