By Mark B. Aragona for Yahoo! Southeast Asia | BDO Money Matters – Mon, 10 June 2013
For the average Filipino, buying your own home is a major life event. There’s a great sense of joy and satisfaction when you can settle your family in a place you can call your own. But for those who take out a mortgage loan, there is also the corresponding burden of a great financial responsibility.
While part of shopping for a home is looking at its location and overall appeal, the first practical move is determining how much you can actually afford to pay for it. And unless you are moneyed enough to buy any house or condo you want with cash, chances are you’ll need to take a mortgage in order to start being a homeowner. That requires prudence and careful planning. Here are some steps to help you determine how much of a home you can afford to purchase.
1. Look at your current monthly budget
The path to being a homeowner requires a practical first step: identify all your income streams and figure out how much you make each month. This will include your spouse’s if they are contributing to living expenses.
Do NOT base your income on how you expect it to grow in the future; after all, you may not get that raise or promotion later on.
Next, subtract your usual monthly expenses such as groceries, tuition fees, car loan payments, taxes, savings, and other monthly dues. Keep a sharp eye out for items that are unnecessary or even wasteful—any amount you can free up some cash will help you own your home sooner.
2. List down your projected monthly expenses as a homeowner
Here you can simulate what your monthly budget will be like once you have a loan and living in your dream home. You can leave out expenses that won’t apply once you become a homeowner, (such as rent for your current residence) but factor in insurance charges, association dues, perhaps hidden costs that are particular to your neighborhood, such as toll fees.
You may not get them all, but try and incorporate as much of it as you can find. Then incorporate them into your current budget. This will tell you how much amortization you can pay on a regular basis.
3. Determine your down payment
Checking whether or not you have you set aside an amount for purchasing your house is another important question. If the financial institution will loan 80 to 90% of the house or condo unit’s appraised value, that down payment should cover the difference between that and the sales value. Also, the size of your down payment will greatly impact your interest rate, so the bigger the amount you have, the less charges you have to pay.
4. Determine the loan you can afford
Now here’s the critical part. Doing this computation will you save you time and effort by narrowing down your search to homes within your price range.
To make things easier, you can use a free online mortgage calculator, or use an amortization factors table. By using the value of the house you want, the lender’s interest rate, and the length the loan’s term, you can find the price range you can afford and how much of a loan you’ll need. While this calculation may give an indication on the financing you need, it’s still best to approach your financial expert or someone from your bank to solidify the figures and find ways to make a home loan work for you.
Here’s an illustration using the aforementioned tools: Say the sale price of the condo unit you wish to purchase is P2.5M. You already have 500,000 for your down payment and only need to borrow P2M more. If the financial institution you plan to approach is currently offering a housing loan of 8%. You decide on a 30-year amortization. Based on the amortization factors table, you will be paying P14,657.21 a month for 30 years before you can own your home. Now you have an idea of whether or not your budget can take that P2M loan.
It takes time and effort to plan the purchase of your home, but it’s preferable to buying one that you can’t afford and only to have it foreclosed years later. Proper planning now saves you a lot of pain and money later on. Do it right and have a wonderful home life.