House Buying Part 2 - How To Pay For It

Yesterday, I  left you with a tale of me getting pissed off at my apartment and consequently looking into the finances of buying a house. Today, I bring to you some of the practical considerations for how you’re going to afford the regular payments for your house.

How Your Payments Work:

1. Down Payment: You pay this up front when you buy the house. It’s recommended to pay 20% of the price of the house as a the down payment. This is a lot of money. You can pay as low as 10% on a regular loan. On an FHA loan (more later) you can pay as little as 3%. Keep in mind that the smaller the down payment, the more you will ultimately pay in interest.
2. Mortgage Payment: You pay a set amount of money to the person/institution that lends you money (usually the bank) every month.
1. Interest: You are charged interest on your money, which is pre-factored into your payments (your payments per month will not change). The interest is a set percent of the amount that you owe, so as you pay off your loan the dollars of interest added each month decreases. If you pay more than your set mortgage payment, you may pay off your home quicker than expected because you’ll be charged less money in interest overall.
2. Extra Fees: If you have a small down payment/are low-income you can get an FHA loan. This means that you pay something called PPI. I don’t know exactly what this is, but it’s factored into your monthly mortgage payment. It’s basically a way to buy a house if you don’t have a lot of cash, but you pay for the ability eventually through these fees!
3. Taxes: You pay property taxes every summer and winter. You can look up your state’s specific rules regarding these, but generally they’re just lump sums of money you pay based on how much the house is worth. Your taxes include your city services, like trash pick-up, leaf pick-up, snow removal, etc. Every city has different city services, so research what’s offered in the location of the house you are buying.
4. Homeowner’s Insurance: You are required to get homeowners insurance before signing the papers to buy the house (just like you’re required to get auto insurance when you drive a car). You can pay this in lump, yearly fees or as monthly payments. You get it from the same people you get auto insurance from (i.e. progressive, state farm, allstate, etc). I’ll do a separate post about this.
5. Utilities: As with most apartments, you pay your utilities to the utility companies. Unlike with apartments, none of these are included in your monthly ‘rent’. You will need electric, gas (heat), water/sewer, internet, and tv (optional). All of the bills are monthly except for the water bill, which you pay every three months for some reason.
1. If you live in a city, you’ll be charged a city rate for water/sewer based on how much water you use. If you live somewhere where there’s a well & septic tank, you’re charged a set rate for access to water (much cheaper!) but will have to pay butt ton of money to clean out your crap-filled septic tank when it gets full.

Types of Mortgages: 

You have to finance you house somehow so most people get a loan from a bank. It's just like a student loan or a car loan, but for some reason it's called a mortgage. I don't know why. Here are some common types:

1. 30 year mortgage: This is the standard mortgage and is probably hard to get if you’re a young person without much of a down payment. However, it’s nice because the interest you pay on your money is constant (unless you voluntarily re-finance). So if you pay 5% interest, that is what you pay no matter what the current interest rate becomes. You also have 30 years to pay off the loan and your monthly payments are calculated accordingly
2. 15 year/20 year/etc mortgage: Same as above but for a different time frame.
3. Arm Mortgage: This is a mortgage that is often offered as a lower monthly payment, but will re-adjust your interest rate after a fixed term (usually 5 or 10 years). Often, this spikes your payments at that point since markets tend to improve over time (but it can help you if the market drops). FHA loans often have arms (who invented these names, seriously?)

Other Forms of Financing:

1. Land Contract: Normally, the bank pays the seller in full, then you pay the bank back slowly. You can cut the bank out of the picture and pay the seller directly over time. This allows the seller to make more money (because you pay them interest) but is really hard to get because most people need the cash from the sale right away.
2. Private loan: This works like a land contract, except that you pay back the private lender instead of the seller, and they pay the seller in cash. Cash sales are the highest valued in real estate and can speed up the buying process. People (usually relatives) might want to loan you the money privately because a lot of times, the interest that you earn on a loan is a lot higher than the interest that you earn on a moderate risk investment in a bank. However, for somebody to loan you money to buy a house, they need quite a bit of money sitting around!

A great resource is www.zillow.com – they give you an estimate of the mortgage payments on a house based on what percent you put down and what kind of mortgage you get. They also estimate taxes (paid twice a year).

As I discovered all of this information from the magical thing known as Google, I concluded that I could definitely afford payments (and taxes) on an FHA loan with 3% on any house under $180,000…but it would be tight because the down payment and my ongoing apartment lease.

The next step was to find out if it was worth it or not.

To be continued…