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Counting The Cost

How do I know how much house/land I can afford?

     A general rule is that you usually can qualify for a mortgage loan of two to two and one-half times your household's income. For example, if your family has an income of $30,000 a year, you can usually qualify for a mortgage of $60,000 to $75,000. Add to this the amount of down payment that you will make, and you have a general estimate of how much home you can afford.

     Lenders use many other factors to determine how large a mortgage you can qualify for. For example, lenders generally prefer that your housing expenses (including mortgage payments, insurance, taxes, and special assessments) not exceed 25 to 28 percent of your gross monthly income. Other long-term debt (monthly payments extending more than 10 months) added to your housing expenses should not exceed 33 to 36 percent of your gross monthly income.

     In addition, lenders want to know about your employment and credit history. This includes finding out about your job and income and how well you handled and repaid loans in the past. If you are self-employed, you can expect to provide more comprehensive information than this.

How can I lower my building costs?

     Begin with the basics, the least expensive home to build starts with the box concept, keep the house as clean lined as possible, limit offsets, projections and keep the roof lines simple. Use standard materials that are readily available in you area and familiar to the applicators. 50/50 is the general rule in calculating the cost of a home, half of the cost is materials and the other half is in labor. So any time you move beyond the box your material and labor cost increase. Compare a single story home to a two story; one would think that you would save on building a two story. Less foundation and roof to cover the same area but you also create more exterior wall, which is one of the more costly elements in construction other than plumbing and cabinetry. What really pushes the cost over the top is labor, which equates to time, scaffolding to finish second story exteriors and adding a higher safety risk. Now that does not take into consideration take advantage of attic space, say adding a bonus room for extra sleeping are recreation area, yes it will cost more but you have eliminated a large portion of the "true" two story factors and moving to a story and a half. The intent here is not to persuade you to build a "box", but to understand that starting with the basics and build on that will help you save. Talk with your list of builders and get there're feed back. The upside, you will go into that discussion with a better cost understanding when it comes down to the specific addon's that will personalize your new home.

How do I get a loan and what will the lender require from me?

     How do I get a loan and what will the lender require from me? Mortgage packages vary widely, and it is important to investigate several options to find the one best for you. Check real estate or business newspaper sections, which may include brief tables on mortgage availability. Look in the Yellow Pages under "Mortgages" for a list of mortgage lenders in your area. Call several lenders for rates and terms on the type of mortgage you want. Compare the mortgages offered by several lenders before you apply for a loan. Before you apply, ask the lender whether they charge any application fees, how much they are, and under what circumstances and to what extent they are refundable.

     There are two major types of mortgage loans -- those with fixed interest rates and monthly payments and those with changing rates and payments. However, there are many variations of these plans on the market, and you should shop carefully for the mortgage that best suits your needs.

     Lenders usually require a down payment of between 10 and 20 percent of the house's price. Additional funds will be required to pay closing costs, which your lender can calculate for you. If you make a down payment of as little as five percent but less than 20 percent, the lender may require you to pay for private mortgage insurance. Requirements will vary by type of loan and often government-backed loans may vary significantly from these guidelines. Under the federal Real Estate Settlement Procedures Act, the lender must provide you with information on known and estimated closing costs.

     For more information, you can contact the Mortgage Bankers Association of America, 1125 15th Street, N.W., Washington, D.C. 20005

What Is a First Day Payment Strategy?

     To get the greatest benefit from this strategy you must make the first payment on your loan the day it is activated, meaning the first payment must be made on the day the lender begins to charge interest on the money you are borrowing. If this is done, an unbelievable number of months will automatically be deducted from the full term of your loan. Keep in mind that the exact amount of savings fluctuates with the interest rate and terms that apply to each mortgage. This strategy works so well because during the first years of the mortgage only a small part of each monthly payment is applied to lowering the principal Balance. If the first payment is made before any interest is charged, the full amount of the payment goes toward paying off the balance. This strategy can be applied at any time during the life of the mortgage, however, it will never accomplish more drastic results that it does with the first payment.

Example of a 30 year mortgage at 8% interest rate making 1 to 5 payment the day the loan is activated:

Pmt. No Pmt. Amt. Mos. Saved Yrs. Saved Interest Saved Yrs. To Payoff
1 $733.76 11 0 yrs. $7,308.23 29 yrs. 01 mo.
2 $1,467.52 20 1 yr. 08 mo. $13,244.84 28 yrs. 03 mo.
3 $2,201.28 30 2 yrs. 06 mo. $19,792.74 27 yrs. 06 mo.
4 $2,935.04 39 3 yrs. 03 mo. $25,639.57 26 yrs. 10 mo.
5 $3,668.80 47 3 yrs. 11 mo. $30,797.67 26 yrs. 01 mo.

How Can I Employ A Split-Payment Strategy?

     How Can I Employ A Split-Payment Strategy Another explosive way to rapidly pay off a mortgage is to make half payments every 14 days not half-payments twice a month, but make a half payment every two weeks (fourteen days).

     The power behind this strategy is twofold. Following this plan will cause you to automatically make one extra payment every year. You will also be lowering the principal of your loan Twenty-Six times instead of the standard twelve times per year. This may seem too simple for it to do much good, but the effect it will have on the mortgage is almost impressive. This simple plan can quickly take a substantial number of years off the term of the loan. It will also save you thousands of dollars in interest, as you know, there are Fifty-Two weeks in each year. If a half payment is made every two weeks, you will make Twenty-Six half payments each year, this is equal to Thirteen whole payments. If you pay one full payment each month, you make only twelve payments each year. Also with the Split-Payment schedule, you will be making a paydown on the balance of the note every Fourteen days, this means less interest will be paid because the principal amount is being decreased more rapidly than one payment every month.

     A total of $164,155.25 is paid in when the regular monthly payment plan is used, and only $117,856.82 is paid in on the 14 day Split-Payment plan, savings on interest is $46,298.43 and you shorten the term of the mortgage by 7 years and 2 months.

     First Day Payment Strategy and Split-Payment Strategy from Rapid Debt Reduction Strategies, by: John Avanzini. More of these strategies are available in the book Rapid Debt Reduction Strategies for $12.95 plus $3.00 shipping and handling by writing HIS Publishing Company, P.O. Box 1096, Hurst, TX 76053.

Example of a 30 year mortgage at 8% interst rate, $733.76 regular monthly payment compared to a split payment of $366.88 every 14 days.

Re. Mo. Pmt. Amt. Split-Pmt. Amt.
Year Bal. Int. Bal. Int.
1 $99,164.64 $7,969.81 $98,336.28 $8,242.10
2 $99,259.94 $7,900.48 $96,528.66 $8,098.21
3 $97,280.15 $7,825.39 $94,564.71 $7,941.87
Years 4 through 17 omitted to conserve space.
18 $67,787.23 $5,565.09 $33,617.43 $3,090.33
19 $64,278.22 $5,296.71 $26,212.49 $2,500.88
20 $60,477.96 $5,004.92 $18,477.15 $1,885.13
21 $56,362.29 $4,689.50 $9,762.77 $1,191.45
22 $51,905.02 $4,347.90 $294.72 $437.77
23 $47,077.79 $3,977.95 $0.00 $0.91
24 $41,849.94 $3,577.29 With this Strategy,
you will never have
to make any of
these payments!
25 $36,188.12 $3,143.38
26 $30,056.40 $2,673.56
27 $23,415.75 $2,164.53
28 $16,223.93 $1,613.36
29 $8,435.20 $1,016.44
30 $0.00 $369.98
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