Home prices may vary greatly throughout the country. But, buying a home is most likely the largest purchase you will make in your life.
Deciding just how much to spend on your home isn’t just a matter of numbers--it also depends on your lifestyle and long-term goals.
In today’s post, I’m going to give you a few ways you can help determine how much is a safe amount to spend on your home so that you’ll feel confident moving into the home buying process that you’re making the best decision for you and your family.
Like most large purchases, buying a home typically isn’t dependent on the amount you have in the bank. Rather, it depends on several factors including your income, credit score, and the type of lifestyle you want to maintain.
One of the simplest ways to determine how much house you can afford is to figure out what percent of your monthly income your mortgage and insurance will be.
For most homeowners, a mortgage payment that is 25% of their income or less is ideal. So, if you earn $6,000 per month, you don’t want your monthly mortgage payment to exceed $1,500.
This “25% rule” does have one flaw, however, and that does not--and cannot--account for each individual’s financial circumstances.
Let’s say, for example, that you earn $6,000 per month, but that you have a large monthly car payment and are trying to aggressively pay off your student loans. You might find that paying another $1,500 toward a mortgage on top of your current bills is bringing you over budget, especially when combined with your other monthly expenses and retirement contributions.
Another caveat to determining how much to spend on a home is that the home itself will require a budget for maintenance. When renting an apartment, repairs are mostly the responsibility of the landlord or property manager.
Homeownership, on the other hand, requires you to make the repairs yourself or hire a professional. And, if you neglect these repairs, you might find that they cost you even more in the long run or drive down the value of your home.
Throughout a given person’s life, they’ll experience raises, promotions, layoffs, medical expenses, childcare costs, and any other number of financial changes. While it isn’t possible to foresee all of the financial fluctuations you’ll experience in life, it is always helpful to have a comprehensive budget.
What do I mean by “comprehensive budget”? The goal of a good budget is to know where each dollar of your income is currently going and to have a plan for each cent that you make. This is a proactive approach to budgeting that will give you an exact number for the amount you can afford when it comes to a mortgage payment.
Within your budget, it’s vital to account for things like an emergency fund, retirement, savings for vacations, and so on.
If you take this due diligence, not only will you have a better sense of where your money goes, but you’ll also be confident in knowing exactly how much you can spend on a home.
