Everyone knows that buying a home is serious business. It will by far be one of the most important…and expensive…purchases of your life. With that in mind, it is understandably easy for new homeowners to get overwhelmed in the labyrinth and mystical world of real estate.
It’s no doubt that when you start to think about buying a home that fundamental question pops into your head. Which is quickly followed by a moment of panic where your eyes get wide, and palms get sweaty as you start looking at your budget and debt to income ratio splayed out in complicated spreadsheets. You think to yourself, can I really afford this?
Figuring out how to answer that question can be daunting. You have to account for certain variables like interest rates, the term of loans, and closing costs.
Earlier this year when I began to play around with the idea of purchasing a home, I wanted to go into knowing exactly how much I could spend before even looking at homes. I did this for one major reason. Like others, I want to achieve financial stability and well honestly… I don’t want to have live on Ramen Noodles for the rest of my life in order to make my house payment every month! This is where the question “how much should I devote to a home” came into play.
When Age Old Advice Doesn’t Offer Any Help
There is that age old piece of advice, “live within your means”, which don’t get me wrong is decent advice, but it didn’t answer the fundamental question. In fact, it raises more questions like; what happens if I get in over my head, what if I fall in love with a house, but I don’t think I can afford it, how long will I be paying on a home, will I have money left over for life expenses? These are all things to consider and questions to knock out before you ever step foot into a home that’s for sale.
Now, we all know budgets are hard to create, let alone follow. I can attest! But they are 1,000 percent necessary when deciding to purchase a home. Granted there will be people out there with the mindset of “what’s the worst that can happen?” But you don’t want to be one of those people! You want to see gorgeous graphs and numbers in an orderly fashion that explain in detail everything you can and cannot afford!
You want to walk into a home for sale thinking “I know exactly where I stand and what I can do”.
Knowledge is Key to Understanding Your House Budget
If you Google “How much should I spend on a home,” 260,000,000 results come up. This tells me that this is a pretty popular question being asked, and there are lots of people out there who are trying to answer it. So where do you start?
Mark Ferguson from Investfourmore says “there is no one size fits all answer to what your payment would be because many factors will increase or decrease the payment on a mortgage. The amount of the down payment, interest rates, term of the loan, mortgage insurance, property taxes and other factors will all determine what your payment amount will be. It is very important what your payment is because lenders will qualify borrowers based on their monthly income and monthly payments.”
In addition to that, he gives new homeowners some good advice when he says, “Buyers will often let real estate agents and lenders tell them what kind of house to buy and how much to spend. Buying a house is the biggest purchase most people will make and it should be treated as such. Buying the wrong house for too much money can be a disaster… [The] number the lender gives buyers, also has nothing to do with the buyer’s comfort level, spending habits or saving habits.”
There are lots of “rule of thumbs” when looking to buy a home. The problem you can run into is that they all tend to be different.
- According to the Wall Street Journal Article, you should “spend no more than 28% of your monthly income on a mortgage.”
- An article from Money CNN states that “to arrive at an “affordable” home price, we followed the guidelines of most lenders. In general, that means your total debt payments should be no more than 36% of your gross income.”
- Or this piece of advice from CBN.com which says “I found that the ideal is to spend no more than 25 percent of your monthly gross income on housing, and have no other debt – no credit card balances carried from month to month, no vehicle loans – no other debt.”
When looking at these percentages it is hard to know which one to follow. Which is why it is so important to remember that there is not a “one size fits all” solution. So what can you do?
Home Purchase Price Calculators and Tools
Or if you’re like me and have absolutely no math skills, use a home affordability calculator. These are a great free tool that allows you to get a better idea of what a payment on your dream home would look like.
There are a ton of mortgage calculators out there on the interwebs but after looking at what seemed like hundreds I settled on using the Zillow Morgage Calculator and the Money CNN Calculator.
- The Zillow Morgage Calculator “estimates your mortgage payment, with taxes and insurance” and walks you through step by step on how to figure out the affordability of a property. It also includes PMI into the payments if you were to choose a down payment of less than 20 percent.
- In addition, the Money CNN Calculator includes a monthly debt column to help determine how much you can actually afford.
It’s important to realize that these calculators’ are meant to give you a good idea of what you can afford, or should spend depending on the numbers that you collect. They are helpful because they can give you a number to work off of.
Albert Einstein was on to Something
It was Einstein who said that “The most powerful force in the universe is compound interest.” This idea of compound interest is something to consider when thinking about purchasing a home.
Many people just look at the price of the home and not all of the fees and interest that comes along with it. Ignoring these numbers could be detrimental to your organized shiny new budget. According to Mark Ferguson from Investfourmore, “If you took out a $200,000 loan at a 4 percent interest rate on a 30-year mortgage, the payment would be about $955 (does not include taxes and insurance). What scares people is that over those 30 years, the borrower would be paying over $143,000 in interest on the loan. That is almost as much money in interest as the loan itself!”
Be sure to include interest in your determination for how much you can afford, and understand the power of interest.
Conclusion and Next Steps
After research and comparing different ideas of how much you should spend on a home I have come to the conclusion that there is no right or wrong answer. It is dependent upon you as an individual.
One of the best things you can do to start is to talk to someone who is in the business. Our team is here to help you wade through down payment amount, closing costs, monthly payments, and total budget. We also have access to the best grants and incentives available to first time homebuyers and even people purchasing their second or third home. These can make a huge difference in the pricing you end up targeting.
Give us a call at 970-573-6441 or contact us here to get started.
As long as you take advantage of the resources that are at your finger tips and understand your costs you should be a mile ahead of the rest! Happy house hunting!