November 16, 2021
By: Team, Tech CU Team, Technology Credit Union
There are always things you want to buy in addition to your normal living expenses. It may be a new computer, a gift for a special person, some clothes, a nice vacation or something for your home or apartment. All of these things take money and you will be faced with a decision - "should I save until I can afford to pay cash for these things or should I just charge them on a credit card?" In your heart, you know you should probably save and avoid interest costs on your credit card, but the temptation to buy them now can be strong. Let's take a look at some of the financial factors you should consider.
The point is not that you should never charge things on your credit card, but rather you should understand that paying interest can be expensive. For example, if you use your credit card for that $3,150 vacation and only pay $150 per month instead of $200, it will take you 25 months to pay it off and you pay over $525 in interest.
Saving funds for a down payment for a car takes discipline, but there are some ways to save to make it easier.
Let us assume you want to buy a new car that costs $25,000. Let us further assume that you want to limit your monthly auto loan payments to $400 (48 month loan of $17,000 with a 6% interest rate). If you do the math, you will find that you would need a down payment of about $8,000. How can you accumulate the $8,000 you need?
Start by setting up an automatic savings plan at your financial institution. That way, each month a predetermined amount will be transferred into your savings account. When you have saved the $8000, you can then buy the car you want knowing you can afford the $400 monthly payments.
How long does it take to save $8,000?
Choose a less expensive car. - If we keep the same $400 monthly loan payments, but choose a $20,000 car, you will only need a down payment of $3,000. That will take less than half the time to accumulate. Choose a 60 month auto loan instead of one with 48 months. Again, we will keep the monthly payments at $400 and a 6% rate. Under these assumptions, your loan would be about $21,000 and you only need a down payment of $4400.
Figuring out how expensive of a house you can afford will largely be dependent on the level of your monthly payments. There will be property taxes, insurance and upkeep, but your monthly payments will probably be the most important part of your decision.
The fine line you walk when determining a level of down payment is based on the level of mortgage payments you can afford and how much money you have for the down payment. Mortgage rates are constantly changing and there are all different types of mortgages available.
Here is a chart showing monthly payment levels for different amounts at different interest rates. It reflects using a 30-year fixed mortgage. Payments with a 15-year mortgage will be higher, but you will pay off the mortgage sooner and pay much less interest over the life of the mortgage.
Most lenders require certain levels of down payments to consider you for a mortgage. It often ranges from 5% to 25% of the purchase price. The larger the down payment, the more comfortable they will probably be giving you the mortgage. You should also remember that it may be nice to have some extra money available after you move into your new home. New carpeting, new furniture or improving the landscaping all take money. You should not stretch yourself too thin financially.
Here are some ways to consider to build funds for the down payment.
Buying a home, especially a first home, is a big financial and emotional step. If buying a home is important to you, do your financial homework. Investigate your mortgage options. Determine what level of monthly mortgage payments will be affordable and comfortable. Use some discipline to save your down payment.
Posted November 16, 2021 by Team