A Cool, Calculated Approach for a Hot Housing Market

What’s your limit?

First, how much can you afford to spend on a home? Consider your monthly income and deduct any non-housing expenses. What remains is pretty much what you have available to spend each month. That magic number will need to cover your principal, interest and insurance payments as well as any property taxes, utilities, maintenance and, if applicable, homeowner association dues.

Set aside some savings

If you’re planning to purchase a home with no down payment or a low one, be aware that mortgage insurance will be necessary until your equity in the home reaches 20 percent. Some loans require mortgage insurance throughout the entire life of the loan and others do not. Either way, keep setting aside savings at every opportunity and check with your banker to learn more about which loan will work best for you.

As you’re socking away, don’t forget a wad of cash that will be expected as you complete your purchase: closing costs. These tend to run two to five percent of the loan amount. You can try negotiating to have the seller cover some of the costs, but be prepared to cover the full amount.

Get prequalified through a lender

To confirm your budget, talk to a lender to determine how much you can borrow. Some buyers obtain a prequalification letter, which provides an estimate based on preliminary information and can help strengthen an offer, as buyers will see you have potential to fund a purchase.

In some parts of the country, you may only have a matter of days to make a strong offer before a property is snapped up. “To be ready when the right home comes on the market, consider obtaining prequalification from a reputable local lender,” says Catherine Close, a mortgage loan representative at Washington Trust. “Sellers may feel more confident accepting an offer when they see that the lender is someone they recognize, trust and find accessible should any issues crop up.”

Pick a loan, any loan

It may seem like mortgage lending options are endless. Although tempting to pick one and move on, it’s important to understand how different options will affect your payments and your ability to build equity in your home.

“Selecting a 30-year term on your mortgage will result in lower monthly payments,” explains Close. “But if you’re comfortable paying more each month, choosing a shorter term may save you money in total interest charges while helping you build equity faster.”

Talk to a banker about the differences between loan products, and ask them to model various scenarios that will allow you to compare the benefits and drawbacks of each. They should be able to show how principal and interest payments will vary based on interest rates (fixed and floating), term lengths and loan amounts.

Enlist a buyer’s agent

For help getting started on the home shopping process, consider enlisting the help of a real estate professional. Ask family, friends and colleagues who have been through the process to offer recommendations on a reliable buyer’s agent.

A good buyer’s agent can help navigate your local market and turn you on to listings even before they hit the market, giving you a leg up on the competition. The best part: their commission is fixed by the seller in the listing agreement and paid by the listing broker, so they won’t add to your costs.

With a little help from professionals and some careful planning, you could be on your way to being financially awesome while kicking back in your first home.