Buying a Home: How to Know How High to Go

(StatePoint) Shopping for a home? Before you begin your search, it’s important to figure out what you can comfortably afford.

“The interesting thing about home buying is that it isn’t a one-size-fits-all process,” says Mike Dawson, Vice President of Single-Family at Freddie Mac. “After all, it’s your budget and these are your housing needs. Doing your homework to figure out what those needs are is the critical first step.”

Before you start shopping, learn how much you can borrow. Free online resources, such as Freddie Mac’s “How Much You Can Afford” calculator, found at calculators.freddiemac.com, can help you get a handle on this figure during the preliminary stages of your search. This estimate is based on income, fixed monthly payments such as auto loans and student loans, and the terms of the loan you plan to take out.

You may also consider speaking to a lender at this stage. If you qualify for a loan, he or she will provide you with a pre-approval letter stating how much home you can afford and the maximum amount you are qualified to borrow. Having this letter can help show the seller that you are a committed and qualified buyer. Keep in mind that the amount your lender is willing to lend is not always how much you should borrow. You should borrow only what you feel you can comfortably repay through monthly mortgage payments. Wait to take this step until you are actually on the hunt, as pre-approvals are usually good for only a limited time.

When determining your budget, consider the length of your loan and the type of loan you want. Do you want to pay back the money that you borrow over 15 years or 30 years? The longer your loan term, the smaller your monthly payments, but you’ll pay more interest over time.

The type of mortgage loan is important, too. With a fixed-rate loan, the interest rate stays the same through the life of your loan, as will your monthly payments. While this can offer some peace of mind, it’s important to know that such loans tend to have higher interest rates because the lender isn’t protected against a rise in its costs over the course of your loan. On an adjustable-rate mortgage (ARM) however, the interest rate may re-set every one, three or five years based on the movement of a specific index and the terms of the loan. Homebuyers may have low interest rates when they first take out their mortgage loans, but the rates may increase over the loan term. If your rate changes at a reset, then your monthly payment will change too.

For a full run-down on all things home buying, visit myhome.freddiemac.com.

One of the most important aspects of home buying is getting a handle on how much home you can afford. Do your research before you begin house hunting, so you can be well informed throughout the process.