Home Sweet Home...Where are you?
Some renters do not realize that it may be possible to buy a home and not have to increase their housing budget. Therefore, this article is particularly important to renters who are serious about becoming home owners.
First, calculate your current total housing costs on a monthly basis as a renter. It will include the base rent and utility, maintenance, tenant responsible repairs and other applicable costs. Use your lease, checkbook statements and credit card summaries to make sure your total housing cost number is accurate.
Second, identify and add the various estimated monthly costs associated with home ownership except for principal and interest monthly payments. Here you will be adding monthly expenses as applicable for items like taxes, homeowner's insurance, private mortgage insurance, HOA/Condo fees, special assessments, utilities, maintenance, repairs and any other associated expenses. Much of this information is available from the listing and consulting your real estate agent, insurance agent, lender and internet sources.
Third, subtract your total partial homeowner expenses from your total expenses as a renter. The result will be the amount of money necessary to cover the monthly mortgage principal plus interest payment due.
Fourth, using a mortgage rate calculator you will be able to determine the price you can pay for a home and not exceed what you are now paying as a tenant.
Here's an example:
Utilities 270 $400
Principal (P) TBD
Interest (I) TBD
Insurance 30 65
Maintenance 25 35
Repairs 25 150
Total $1850 $850 + P & I
Setting the two totals equal to each other you can solve for P&I which is a $1000/month.
Note: A $1500/mo. average rent was chosen since it is the average national rent as of the end of 2019.
Using a mortgage rate calculator you can now determine how much you can afford to pay for a home and keep your housing costs the same as renting.
Here is an extreme example of how much you can afford to pay for a home with no down payment and little or no money for closing providing you are a first-time home buyer.
Using the CNN mortgage calculator at https://money.cnn.com/calculator/real_estate/mortgage-payment/ choose the advanced options choice. Input $780 for insurance, $2400 for property taxes, 4.875% for the mortgage rate and $154230 for the home price. The 4.875% mortgage rate is as of March 2020 from the Navy Federal Credit Union (NFCU). It is a zero down payment with no private mortgage insurance required for members with an acceptable FICO score. Since your input numbers most likely will differ from the example you will have to vary the home price until you get your specific P plus I number.
Money to cover all or some of your closing costs is available from many states. Some states offer outright no-payback grants while others require that the buyer pay back the grant once they sell their home. Google your state's housing website for first-time buyer closing cost help details.
Finally, in Southwest Florida and Southwest Michigan where I practice, a home price of $154230 as of late March 2020 enables home buyers to choose among 179 and 313 single family homes for sale respectively. The higher the rent you are paying now in localities like these the more home buying choices you will have.
Happy house hunting!
Jim Lawson, DBA
Licensed Florida Broker Associate/Michigan Associate Broker
Licensed Florida Professional Engineer (Architectural) & Home Inspector
(239) 450-7178 (Direct)
Call, text or email at your convenience.
Serving Sellers, Buyers & Landlords.
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5750 James Drive, Stevensville, MI 49127
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