1. For first-time home buyers

Buying your first home is a big and exciting step, but it’s important to understand your budget before you start looking at homes. Here are some simple ways to estimate how much home you can afford:

Key points to keep in mind:

• Down payment: Most banks/lenders ask for a down payment of 3%-20% of the home’s value. If you pay a higher down payment, your loan and EMI will be lower.
• EMI: Use an online mortgage calculator to estimate your EMI based on your loan amount, interest rate, and tenure (15 or 30 years).
• Debt-to-income ratio (DTI): Banks generally want a DTI of less than 43%. To calculate this, divide all your monthly debts (including credit cards, car loans, and new home loans) by your total monthly income.
• Closing costs: This is 2%-5% of the home price—add this to your savings.
• Emergency fund and repairs: There are many unwanted expenses that come up after buying a home, so save money beyond the down payment.

How to decide on a budget?

• Check your credit score: A good score gets you a better interest rate.
• Get pre-approval: The bank will look at your income and debt to tell you how much loan you can get.
• Calculate affordability: The EMI of the house, taxes and insurance combined, should not exceed 28% of your total income.

Tip: Don’t fill your budget completely. Save money for lifestyle and future goals too.

2. For existing homeowners

If you already own a home, refinancing your mortgage can help you lower your EMI, save on interest, or take money out of your home’s value. But it may not always be beneficial—here’s when to refinance:

When to refinance?

• If interest rates have gone down by 0.5%-1%.
• If your credit score has improved.
• If you want to take a 15-year loan instead of a 30-year loan (this will lead to a higher EMI but lower interest).
• If you want to take money out of your home’s value (Cash-Out Refinance).

Things to keep in mind:

• Closing costs: Can be 2%-5% of the loan amount—is it worth it in the long run?
• Break-even point: In how many months/years will you cover the cost of refinancing?
• Loan type: If you plan to move house soon, also look into Adjustable-Rate Mortgage (ARM).

Tip: Compare new and old loans with a refinance calculator.

3. For Real Estate Investors: Calculate ROI on Rental Property

If you are investing in rental property, it is important to calculate ROI (Return on Investment) to understand the profitability.

Key Metrics:

• Cash Flow: Rental Income – (EMI, Taxes, Repairs, Vacancy Period).

• Cap Rate (Capitalization Rate):

  • Cap Rate= Net Operating Income (NOI)/Property Price × 100

A higher cap rate indicates better ROI.

• Cash-on-Cash Return:
  • CoC Return = Annual Pre-Tax Cash Flow/Total Cash Invested × 100

Measures return relative to your initial investment.

Appreciation Potential: Long-term property value growth.

Additional expenses:

• Property management fees
• Repairs (1%-2% of home value annually)
• Tenant replacement costs

Tip: Choose properties with positive cash flow and diversify your investments to minimise risk.

4. For Financial Planners: Help Clients with Home Loans and Buying

If you are a financial planner, follow this process to help clients buy a home:

Step-by-step guide:

• Do a financial health check – look at credit score, income and existing debts.
• Determine affordability – remember the 28/36 rule (home expenses should not exceed 28% of income, total debt should not exceed 36%).

Understand loan options:

• Conventional loans (5%-20% down payment)
• FHA loans (3.5% down, can be obtained even with low credit scores)
• VA loans (0% down for veterans)

Plan for additional expenses:

• Property taxes, insurance
• PMI (if down payment is less than 20%)
• Closing costs, moving expenses

Look at the long-term impact

Will buying a home affect retirement, children’s education or other investments?