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Buying a home is not something that should be done willy-nilly. In fact, it is wise to plan out your home purchase, making sure that you save up money for a down payment, and making the necessary adjustments to ensure that you truly can afford the mortgage that you want. One way to help you decide whether or not you can buy a home is to practice making home mortgage payments.

Setting up a practice home mortgage payment system

The first thing you need to do is figure out the true cost of owning a home. You can use mortgage loan calculators to help you figure out the monthly cost of your mortgage plus interest. There are also mortgage calculators designed to help you estimate property taxes and maintenance costs. It is important to add these expenses into your total, so that you are working off a more accurate estimate of your total housing costs as a result of buying.

Once you have an estimate of how much it would cost to own a home, you figure out how much more it would cost than your rent costs. If your rent payment is $900 per month, and you figure that your mortgage payment and interest plus other costs would be around $1,200, that’s a $300 difference. That means that you will need $300 extra each month in order to have a mortgage. In order to test whether or not you can afford a home mortgage payment, take that $300 and put it in a high yield savings account each month, using it as a practice mortgage payment.

Can you go at least six months with this new “mortgage payment”?

Now comes the real test. Can you make that extra “mortgage payment” every month for six months. Can you do it without exceeding your income? Or do you have to resort to credit cards to make it work? This exercise is a great eye-opener, helping you see what a mortgage payment might do to your financial situation, and whether you can handle the added expenses that come with buying a home.

Review your finances each month to see how you are doing. With that $300 going into a savings account, you might soon realize that you need to make some changes. Do you see places where you can cut back? Look at your spending, and figure out how much of it is discretionary. If you want to buy a home, but you are having trouble making your practice mortgage payment, you may want to re-evaluate your spending, cutting back on things like entertainment, eating out, and other unnecessary items. This can be a good way to re-structure your household budget so that you are ready to take on the costs of home ownership.

Down payment

Hopefully, you have been saving up toward a down payment for a couple of years. Adding an extra $300 for six months can mean another $1,800 to add to the down payment, or it can help offset closing costs or pay points for an interest rate deduction. Today, though, it is vital that you have money saved up for a down payment. If you get a FHA loan, you will need a 3.5% down payment (10% if your credit score is below 500), plus an up-front fee of 1.5% and an annual premium of 0.5%. If you go with a different lender, you will probably need 5% to 10% (or more) as a down payment.

Bottom line: Before you buy, you need to make sure your household budget can handle the costs of home ownership. A practice home mortgage payment can help you determine this, and can help you take a realistic look at your budget and decide on what measures you need to take in order to get your finances in order so that buying a home doesn’t put you under too much financial stress.

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