Are you getting ready to take advantage of low interest rates and buy a home? If so, you’re about to make one of the largest and most important investments of your life. While home ownership can be extremely rewarding, it can also be challenging if you end up buying a home you can’t afford. Since home purchases include a lot of maintenance costs and closing fees you may not anticipate, it’s easy to get in over your head with a home that’s just too expensive for your budget. To avoid becoming “house poor,” here’s how to calculate how much money you can spend on a home, whether you’re taking out trust loans or a traditional mortgage.
Figure Out How Much You Earn
Before you can decide how much money you can spend on a home, you need to figure out how much money you earn. Include salaries and earnings you and your partner or co-buyer make. Don’t forget to account for all revenue streams, including rental earnings and alimony.
Calculate Housing Costs and Total Down Payment
At this point in the process, you can list the costs of homes you’re interested in buying. Be sure to include homeowner’s insurance, annual property taxes, estimated mortgage interest rates or the interest rates you’ll pay to hard money lenders. Don’t forget to consider maintenance and repair costs you’ll need to take care of as a new home owner. These can add up quickly, especially if you’re buying an older home with a lot of maintenance needs.
You’ll also need to figure out the loan terms for which you’ll apply. Most people apply for 30 years, but some home buyers choose to apply for shorter terms. To make sure you’re getting the best rates and terms available, talk to a trusted lending company about the various loans available for home buyers. You may qualify for trust loans, probate loans or some other type of loan.
Figure Out Your Expenses
Once you figure out how much money your household brings in, you should calculate your monthly expenses with as much detail as possible. Your list of expenses should include the following:
- Food expenses
- Medication costs
- Dates and eating out
- Gym memberships
- Health insurance
- Retirement contributions
You’ll also want to give yourself a financial buffer so you can take care of any emergency expenses that could arise. It’s always better to buy a home that’s slightly below your estimated price range than slightly above it.
Follow the 28/36 Rule
Many homeowners use the 28/36 rule to avoid getting into a mortgage-related financial bind. This rule states that you should always spend 28% or less of your gross monthly income on a house. This includes all expenses associated with home ownership. You should also make sure that you spend 26% or less of your income on total debt (including your home, car, credit card payments and everything else). If you follow this rule, you’ll be less likely to get into a financial bind from buying a house that’s more expensive than you can actually afford.