In the event you do not have a 20 percent down payment, lenders
will allow a smaller down payment - as low as 5 percent in some cases.
With a smaller down payment, borrowers are required to carry Private
Mortgage Insurance. Private mortgage insurance will require
an initial premium payment of 0.5 percent to 1.0 percent of your
mortgage amount plus an additional monthly fee depending on your
loan's structure. On a $75,000 mortgage with a 10 percent down payment,
this would mean a premium of $338 to $675 for the first year and
an extra $15 to $20 a month in subsequent years.
The first thing you have to examine is how much you are worth. Take
into account your income, savings, investments and other holdings such
as Individual Retirement Accounts (IRAs) or Keogh plans, cash value
of your life insurance, pensions or corporate savings plans, and equity
in real estate. Lenders will need this information before deciding
to extend you the loan.
Often, the amount you earn may not be as important as how you earn
it. Bonuses and commissions can vary greatly from year to year, and
lenders are reluctant to depend on them if they make up a large part
of your income. There are similar problems when a large portion of
your salary is based on overtime pay, and you rely on it to qualify
for the loan. To get a realistic view of what your income level actually
is, average your income (including bonuses, commissions and overtime)
for the past two or three years.
As a last resort, pensions and corporate thrift plans can provide
another source of down payment money. Most plans or policies give you
the option of either withdrawing your money with no repayment or borrowing
against the cash value. Though it is not the best policy for most home
buyers to borrow from these sources in addition to borrowing mortgage
money, they can often get rates substantially lower than those on many
other kinds of loans. Remember - if you borrow against the cash value
of your life insurance or employee thrift plan, you will be making
principal and interest payments for these separate from your mortgage.
You should estimate these payments under installment loans on the worksheet
While turning your savings, investments and other
holdings into cash (making them "liquid"), remember, you will probably
have to pay tax on most of it. One source of tax-free money often
overlooked is a gift, or money given by a parent or other relative
that need not be
repaid. A person may give another person up to $10,000 per year without
either party being taxed. Your parents, for example, could give you
and your spouse up to $40,000 tax free.
Your liabilities are those expenses for which you are responsible
each month. These include loans such as student, auto, personal and
credit card balances. When calculating your liabilities, use the entire
limit for your credit cards, as if you had to pay them off entirely
this month. That way, you give yourself some breathing room should
you run up an unusually high balance during your mortgage term.
You should estimate these payments under liabilities on the worksheet.
It is always wise to put a little money away "for a rainy day" -
especially when you are paying off a mortgage. If something arises
such as unexpected medical costs or substantial auto repairs, you
want to be able to pay those expenses without jeopardizing your ability
to meet your mortgage payments. Most financial experts suggest that
you always have six months income on hand in case of emergency.
When calculating your annual income, remember to take into account
all sources. You may, for example, receive dividends from investments,
alimony or child support payments. Calculate your annual income below.
This list should get you started, but you may have special expenses
that are not listed here. Remember, when you buy your house you will
no longer have to pay rent, and your utilities costs will change. You
can use this money for your mortgage payments or other operating costs
associated with your new home.
Of the costs of home ownership, the ones listed on the next page are
the most important. Homeowners insurance premiums usually run about
$300 to $500 per year, and property taxes and maintenance costs will
vary, of course, depending on the size, age and condition of your new
house. Estimates for the costs of utilities, maintenance and improvements
can be obtained from Realtors, local utility companies and others.
Some home buyers will have an additional cost if they are purchasing
a condominium or a co-op. Condo and co-op fees are an additional amount
paid monthly on top of the mortgage payments. Some homeowners will
also incur a home owners association fee for their block or neighborhood.
These fees vary greatly from location to location.