Steps to Buying a Home

By: Horizon Bank Last Updated: October 20, 2011

closing-costsAre you considering purchasing a new home? It’s one of the most important financial decisions anyone can make. That means there’s much to consider.

How much can you afford?

The first step is assessing your financial situation. The financial experts at Horizon Bank can help you do this, but here are some general guidelines:

  • All of your monthly housing costs should be roughly 28 percent of your gross income, or the amount you earn before taxes. This includes your mortgage payment, homeowner’s insurance, property taxes and related costs.
  • Examine your monthly expenses as compared to your income to establish a budget and determine what you can afford. Remember that utilities and maintenance costs may increase with a home as compared with an apartment, so it’s important that you have extra funds left over each month.

Should you buy or rent?

If you’re renting, but are considering buying a home, you need to make sure you can afford more than just your house payment. As we just noted, costs increase with home ownership. Renters aren’t charged with paying for upkeep, or maintenance, but many properties require the purchase of renter’s insurance. Renting typically means you’re more mobile and can move somewhat easier than if you had to sell a property before moving. Purchasing a home, however, does offer financial advantages because of being able to build equity with each of your monthly mortgage payments. Plus, most homeowners can use their mortgage interest as a deduction against annual income taxes.

Should you consider escrow?

Escrow is a legal arrangement by which one party places funds into an account to be delivered to another individual or business after particular conditions are met. The account is overseen and funds are transferred by a neutral third party.

If you have difficulty saving large sums to pay large-sum bills (like homeowner’s insurance or property taxes) on your own each year, then having an escrow account may be a beneficial step to buying a home. Since you’ll be paying a small amount toward the costs along with your monthly mortgage payment, you’ll be able to build the cost into your budget more easily throughout the year. By placing these funds in escrow, you ensure the lender that you can cover these costs.

There are a couple ways to set up an escrow account. You can put money in escrow only once before closing on the home to cover such expenses for the first year. You can also do it throughout the life of the loan as part of your monthly payment going into escrow. The escrow administrator is responsible for making the appropriate tax and insurance payments from the account.

Deciding whether you should rent or buy a home, what kind of home you can afford, and whether you set up an escrow account to help you manage your finances are important steps to buying a home. Learn more about purchasing a home by contacting your local Horizon Bank branch or visiting our online Mortgage Center.