Buying a home is expensive, probably the most costly thing you’ll ever buy.
While finding your ‘dream home’ is often pushed as the ultimate goal, spending too much on a mortgage for a place to live could easily turn into a financial nightmare. That doesn’t need to happen.
Many experts recommend that you spend no more than 25 to 28 percent of your take-home pay on monthly house payments, including the extra costs of home insurance and property taxes.
So, if you’re bringing home $80,000 a year, 28 percent would equal payments of about $1,867 a month over the term of the loan. If $400 of that amount is for insurance and property taxes, that remaining $1,467 payment would equal a 30-year fixed-rate loan of $300,000 at an interest rate of 4.2%.
Does that limit you to a $300,000 house? No, but you’ll have to make a down payment big enough to bring your loan to that amount. That’s at least $20,000 down on a $320,000 home or $100,000 on a $400,000 house. You’ll also need to factor in one-time closing costs – which likely will run a few thousand dollars – and moving costs.
Online home-buying calculators can help you get a feel for what mortgage payments will be, based on the cost of the home, your down payment, the loan interest rate and the length of the loan. You can even talk to lenders about getting prequalified for a loan, but beware that you might actually qualify for a bigger loan than you can comfortably afford.
Experts advise potential homebuyers to look beyond mortgage payments because the more you spend on a house the less you’ll have for other things. Student loans, car loans, child care and other expenses such as utilities, groceries and entertainment will take chunks of money each month too. They also stress the need to save as well. That means setting aside money for things such as an emergency fund, vacations and retirement.
A good reality check is putting together a spreadsheet that factors in mortgage payments, all your other expenses and your income. Are you comfortable with the final numbers? Does that leave you any savings?
Go ahead and dream about that new house, but make sure the reality is something that you can afford.
