This is a Guest post from our friends at hashching.com.au
Planning to buy your first home? Congratulations!
But are you aware how much house you can afford to buy?
According to most lenders, your monthly house payments must not exceed 30 percent of your pre-tax income. However, there are many other factors that determine your affordability, including your income, credit history, as well as the size of your down payment!
Yes, gone are the days when you could borrow the full sale price of a property. Today, lenders require you to put upfront a certain percentage of the sale price as a deposit to fund your house. The percentage may vary according to the price of the property and the type of loan you are subscribing for. For example, FHA loans require a minimum down payment of 3.5 percent. Most lenders, however, require a 20 percent deposit, and you’ll need private mortgage insurance (PMI) if you put down less than 20% of the purchase price.
This means, for a median-priced house of $200,000, you need a minimum amount of $7,000 (3.5 percent of the purchase price) as a deposit. Also, you must cater for closing costs such as mortgage application fees, attorney’s fees, inspections and surveys, escrow deposit, and recording fees that could amount to 2 to 5 percent of the loan amount.
Saving for a home loan deposit
Saving $7,000 for a property does not sound like a humungous task. However, it is always advisable to put down as much money as you can for your deposit – because the bigger your down payment, the lesser would be your monthly repayment amount. Borrowers with larger deposits are also in a better position to negotiate a lower rate on their home loan, meaning more savings on your mortgage.
But how do you boost your savings in the face of stagnating incomes and higher cost of living?
It is true that the cost of housing, healthcare, and education have skyrocketed in the past two decades while the wage-growth has largely remained stagnant. People today have much less money to stash away as compared to many years ago, making it hard to save money, but not impossible!
A little bit of financial planning and a lot of discipline can help you boost your savings immediately. Let’s see how.
Set a savings target:
Saving for a goal is much easier than randomly stowing away a certain amount of money each month. So, start by figuring out how much you need to save by checking the market price of properties similar to what you intend to buy in the area of your choice. Once you have an estimated figure in your mind, use this savings calculator to work out how much you need to save each month to reach your goal in a predetermined timeframe.
To save consistently, many financial advisors suggest setting up automatic transfers from your checking account to your savings – making the process mandatory and easier to continue.
Track your expenditure:
According to Bily Xiao, founder of WealthMobius.com, “Too many adults do not have an accurate view of their income and expenses. But if you measure it, you can improve it. So start tracking, take stock of how much you’re saving, identify low-hanging fruit of expenses you can cut, and start setting some incremental goals to increase your savings…” (Source)
Indeed, with your savings target set, the next step is to review your income and expenditure to create a household budget. The process will hardly take you a couple of hours, but the results could be phenomenal.
Use this budget planner to create a realistic plan to reduce your expenditure without compromising on your lifestyle too much. Do remember to include all your regular expenses such as groceries, coffee, lunch, transport, movies, etc. You must also include all your ongoing debts to get a clear picture of your finances. Once you have everything in front of you, it is time to identify and cut down on unnecessary expenses.
Think about it – A tall latte at Starbucks probably costs you just under $3 every morning. However, by spending a few minutes to brew your own cuppa, you could save almost $1,000 a year! Cooking your lunch ($5) instead of buying it every day (minimum $10) can save you over $25 a week! Giving up on cigarettes or reducing your weekly pints of beer could also add to your savings significantly while boosting your health. And what about that magazine subscription you rarely read and the gym you barely visit? Why not subscribe to online magazines instead and save some money and paper? About the gym, unless you are in it for serious exercise, running around the block could have similar health benefits for free!
Banking your windfall income could be a smart way to boost your savings for a deposit. Windfall income includes your annual bonuses, salary hikes, tax-refunds, gift-money, and commissions, etc. By depositing these chunks of money into your savings account, you can reach your targeted down payment amount much faster and move into your own home sooner!
Pay down your debts:
It might sound counter-intuitive to pay down your debts when you are trying to save for a deposit, but it really isn’t! Think you about it – you have a high-interest rate credit card debt that’s charging you 10 percent per annum, and your savings account only gives you an interest of 2 percent. What’s going to save you more money? Paying down the debt, of course! Besides, too much debt can also bring down your borrowing capacity.
So, if you are planning to buy a home, try to pay down your other debts as quickly as possible. You could take advantage of 0 percent balance transfer credit cards but do read the fine print carefully.
Mostly, the 0% deal only applies to the debt you transfer. If you use the new card for other purchases, you’d likely be charged a high rate of interest. Besides, subscribing for a new credit card very close to your home purchase could also bring down your credit score.
Saving for a down payment for your first home might seem daunting, but a little bit of financial discipline could boost your savings significantly, making it easier to purchase your home as well as manage your repayments later.
In addition to following these savings tips, we also suggest that you take advantage of the various government-assisted schemes for first home buyers that will make it easier for you to purchase your home. Visit the official website of the United States government to know more. It could also be beneficial to speak to a mortgage broker in your area to find competitive home loan deals as well as guidance on your home buying journey.
HashChing is Australia’s first borrower-friendly online marketplace that allows users to compare broker pre-negotiated mortgage rates from over 70 lenders across the country. Users can also post their home loan queries online to receive resolutions from experts, free of cost!