Although buying a home isn’t easy for everyone, it has become more accessible than ever, thanks to lending agencies and banks offering more flexible home loans and mortgages. Even without substantial capital or a large down payment, you can still afford the home of your dreams at a reasonable price.
Many people think that buying a home requires a large down payment and is a complicated process, but this isn’t always true. The home-buying process primarily depends on your budget. Any down payment you make reduces the total purchase price and the amount of your monthly payments. The larger the down payment, the lower your monthly payments will be.
For those who don’t own a home, renting a house or apartment can be a practical solution. However, rental payments go toward housing that you don’t own, while a mortgage payment contributes to your ownership. Owning a home is a dream for many, and renting can sometimes cost as much as a mortgage, which doesn’t make financial sense.
Instead of renting, you can convert your rental payments into monthly installments toward your own home. Across the United States, many banks and lenders offer accessible loans for purchasing real estate at low interest rates. With a low interest rate, you can afford the home of your dreams with manageable monthly payments.
It’s important to choose a loan plan that suits your needs. You can obtain a loan through a bank, a lender, or an online service. Real estate agents, who are very common today, can also assist in securing a great deal on a home that fits your budget. Planning ahead, finding a reliable real estate agent, and pursuing your dream home are crucial steps when buying a house.
By planning your budget and taking the process step-by-step, you’ll be closer to owning your dream home than you might think. Continuing to rent means paying for something you don’t own, making your dream home feel more distant. Take action now to stop renting and start investing in your own home.
Understanding the Fundamentals of Personal Finance
First, you need to eliminate your debt, establish a budget, and build an emergency fund covering 3–6 months of expenses. These are essential steps. If you haven’t completed them, you’re not ready to upgrade to your dream home just yet.
When you have house fever, it can be challenging to focus on paying off debt or saving for an emergency fund, especially with the pressure of rising home prices and interest rates.
However, whether it’s your second or third home, you should only buy a new one once you’ve covered the abovementioned financial basics. This way, you’ll be well-prepared to start the journey toward owning your dream house.
That journey begins with understanding your home equity. What is equity? We’re glad you asked—that brings us to step one.
Step 1: Determine Your Home Equity
Home equity is straightforward: it’s your home’s current value minus what you still owe on your mortgage.
Your home’s value typically increases over time, much like other long-term investments such as retirement accounts. Despite market fluctuations, real estate values have consistently risen. According to the St. Louis Federal Reserve, the average home sale price increased by over 2,300% from 1965 to 2023 and by 68% from 2013 to 2023. As your home’s value grows, so does your equity—a process known as appreciation.
Factors that increase your home’s equity include:
- Added value: Home improvements, like adding square footage, updating fixtures, or a fresh coat of paint, can enhance your home’s value.
- Mortgage paydown: Paying down your mortgage reduces your debt and increases your equity. The less you owe, the more equity you have.
The amount of equity gives you an idea of how much money you’ll have after selling your house, which can be used for a down payment and other home-buying costs.
To determine your home’s value, you can use real estate websites like Zillow, request a competitive market analysis from a real estate agent, or get a professional appraisal.
Here’s a simple example: if your home is worth $355,000, after accounting for closing costs (1–3%), real estate agent fees (6%), and your remaining mortgage balance, you might clear over $223,000. This substantial amount can be a significant down payment on your dream home. If your home is paid off, you’ll have even more funds for repairs and moving expenses.
Step 2: Set Your Dream Home Budget
Once you know how much you’ll clear from selling your home, you can start budgeting for your dream home.
To avoid financial strain, keep your mortgage payment to no more than 25% of your take-home pay on a 15-year fixed-rate mortgage. Aim for a down payment of at least 20% to avoid private mortgage insurance (PMI). Avoid 30-year mortgages, as they result in higher interest payments over time.
For example, if your take-home pay is $4,800 monthly, your monthly mortgage payment should be no more than $1,200. This 25% should also cover other monthly home-related fees like HOA dues, insurance, and property taxes.
Use a mortgage calculator to determine how much house you can afford and budget for additional costs like moving expenses and necessary upgrades or repairs.
Step 3: Find the Right Dream Home for You
Now it’s time to start your house hunt. List features that align with your budget, lifestyle, and dreams. Here are a few tips:
Location and layout: Choose a neighborhood and floor plan that suits your long-term lifestyle.
- Space needs: Ensure the home meets your family’s current and future needs.
- School districts: Good schools can increase your home’s value, even if you don’t have children.
- Future value: Consider whether the area is growing and whether home values are rising, which indicates a good investment.
- Cost considerations: Distinguish between must-have features and nice-to-have upgrades to stay within budget.
Step 4: Be Picky and Patient
Take your time finding the right house. Avoid settling for a less-than-ideal home due to impatience.
Find a real estate agent who understands your budget and goals. They should be committed to helping you find your dream home.
To be prepared for when the right home comes along, consider these steps:
- Getting pre-approved for a mortgage shows sellers you’re serious and speeds up the closing process.
- Offer earnest money: This deposit demonstrates your interest and is usually 1–2% of the home’s purchase price, applied to your down payment or closing costs. You can typically get most of it back if the deal falls through.
Find a Real Estate Expert in Your Local Market
Whether you’re ready to find your dream home or still preparing, following these steps will help you make a wise purchase.
Once you’re ready, connect with one of our RamseyTrusted real estate agents. These agents adhere to the Ramsey way and share your values, ensuring your home search is in good hands.
Frequently Asked Question
How do I determine my budget for buying a home?
To determine your budget, start by assessing your financial situation. Calculate your monthly take-home pay and ensure that your monthly mortgage payment doesn’t exceed 25% of this amount on a 15-year fixed-rate mortgage. Aim to save at least a 20% down payment to avoid private mortgage insurance (PMI). Consider other expenses like property taxes, insurance, and homeowners association (HOA) fees. Use online mortgage calculators to clearly understand what you can afford.
What is home equity, and why is it important?
Home equity is the difference between your home’s current market value and the remaining balance on your mortgage. It’s important because it represents the portion of your home that you truly own. Building equity can help you secure a better loan for your next home and provide a substantial down payment. Equity grows over time as you pay down your mortgage and as your home’s value appreciates.
How do I find out the value of my current home?
To estimate your home’s value, you can use real estate websites like Zillow for a ballpark figure, ask a real estate agent for a competitive market analysis, or hire a professional appraiser. These methods will give you a good idea of your home’s market value, which is crucial for determining your equity and planning your next purchase.
What factors should I consider when choosing my dream home?
When choosing your dream home, consider factors such as location, layout, space, and future value. Look for a neighborhood that fits your lifestyle and has good schools, even if you don’t have children, as this can increase your home’s value. Ensure the home’s layout and size meet your current and future needs. Research whether home values in the area are rising, indicating a good investment.
Should I get preapproved for a mortgage before house hunting?
Yes, getting preapproved for a mortgage is highly recommended. It shows sellers that you are a serious buyer and gives you a clear understanding of how much you can afford. Preapproval can also speed up the closing process once your offer is accepted, giving you an advantage in competitive markets.
Conclusion
Buying your dream home is a significant milestone that requires careful planning and financial preparation. By understanding your budget, building and assessing your home equity, and getting preapproved for a mortgage, you set a strong foundation for this important purchase. Consider the key factors of location, space, and future value to ensure your new home meets your needs and represents a sound investment. Partnering with a knowledgeable real estate agent can make the process smoother and help you navigate the complexities of the housing market.