What Can You Afford?
Figuring out how much you can afford to spend on a house on Hilton Head can be confusing. But you can boil it down to two simple questions:
- Without completely depleting your savings, what is the biggest down payment you can make?
- What is the biggest total payment you can make every month, including EVERYTHING?
Of course, nothing is ever that simple. Each question has multiple parts. Let’s start with the down payment question.
The Simple Rules Of Down Payments
A down payment is the amount of money you pay, up front, for your new property. It represents the amount of the home you’ll own from the very start. The bigger the down payment, the more of the home you own and the smaller the loan amount required.
The typical recommendation is 20% of the home’s value. This magic number does two things: the mortgage company will not require you to purchase mortgage insurance AND it makes it easier to qualify for the loan. It’s a demonstration that you have serious interest in the property.
It is not, however, required that you put down that much. First time homebuyers can put down lesser amounts. Your mortgage broker or banker will help you determine how much you’ll want to put down, but numbers as low as 5% are possible in the Hilton Head Island area.
While it’s good to pay a large down payment for your home, don’t completely drain your savings. You’ll need a cushion to help you move into your home, make changes, and to protect yourself in case of emergencies. You’ll want to balance the benefits of paying more against keeping as much cash on hand as you’ll need.
The price you negotiate for your new Hilton Head home, villa, or condo isn’t everything you’ll pay for. It’s only the start. But these costs don’t have to be a surprise. Here’s a basic list — your Dunes Marketing Group Realtor can go over all of the closing costs with you in detail:
- Appraisal Report
- Inspection Fees
- Escrow Costs
- Title Insurance
- Financing fees
These costs can add up — frequently up to 5% of your negotiated price on the home (not counting your down payment). Often these costs can be folded into your mortgage, but you may want to pay some or all of them out of pocket. And, of course, everything is up for negotiation.
The Monthly Payment
Your monthly mortgage payment will most likely be calculated by a simple acronym: PITI. It stands for Principal, Interest, Taxes, and Insurance.
If you make a down payment of 20% or higher (or after your equity reaches 20%) you can request your mortgage servicer drop the mortgage insurance requirement and save you a little money each month. The mortgage insurance is to protect the lender, not you.
You may, however, pay your homeowners’ insurance as a part of your monthly payment. This helps to eliminate the one yearly big payment, but it will likely change your payment amount yearly as the insurance rates often increase.
You can also pay your taxes separately, but for many first time homebuyers it’s easier to make this a part of your monthly payment. If not, you’ll write a big check, once every year, to pay your taxes.
Principal and interest are the core of your loan. Initially, your payment will be almost all interest and very little towards reducing the principal of your loan. As years go by, these ratios will change. You can also make additional payments directly towards the principal. That’s a great way to reduce both the cost and the length of your loan (and it’s voluntary).
The Ongoing Costs of Home Ownership
If you’re a first time buyer, you might not be thinking about how much it takes to maintain a home on Hilton Head Island or in the coastal area. These are costs that go beyond that initial price you negotiated. Some are monthly costs. Others are periodic (like taxes), or sporadic, like emergency maintenance. They can include:
- Mortgage Insurance (if you put less than 20% down);
- Property taxes;
- Property Owners Association (POA) or Condo Fees;
- Club Fees (if your home is part of a golf or tennis club or a resort complex);
- General maintenance and repairs;
- Landscaping and maintenance;
- Gas, electric, cable, internet, and other services;
- And, of course, furnishing your new home.
Don’t leave these cost calculations to the end where they can be an unpleasant shock. Your Dunes Marketing Group Realtor can help you calculate these costs, add everything up, before you even start visiting properties. You’ll need it all to be part of the “What can I afford?” equation.