If you are preparing to purchase your first house, one of the first questions you may ask is “How much can I spend on a home?” Homeownership necessitates more planning and expenses than renting does, so it is important that you consider this question carefully. You do not want to end up house-poor, or find yourself needing to take on a second job so that you can make ends meet.
Take the time to think about the following seven questions. They may help you get a better idea of what you can reasonably afford to spend on your first house.
Different mortgage lenders will have different income requirements, but for the most part, they do not want to see you spending more than 28 percent of your gross monthly income on your mortgage. This means that if your monthly household income (pre-tax) is $10,000, your mortgage costs should not exceed $2,800.
This amount can give you some guidance when you are trying to answer the question “How much can I spend on a house?” However, there are a number of other factors that may influence you to shoot for a mortgage payment that is significantly lower than the one you may qualify for.
This is a good baseline from which to start. If you are already used to spending a certain amount on rent each month, you already know that you can reasonably afford at least that much on a mortgage payment.
If you are currently in a rent-free situation, such as living with your parents, figuring out a general idea of what you can afford might prove a little bit more difficult. In this case, you may want to sit down with your parents or a financial advisor to work out a reasonable budget, or you may find it beneficial to rent a home for a year instead of potentially walking into a financial commitment that is more difficult to manage than you’d previously expected.
Keep in mind that home ownership comes with additional costs. You may want to budget in extra money each month to go toward simple home improvement costs such as painting, installing new carpeting or improving the décor of your home. Speaking of additional costs…
Do not forget to add in taxes and insurance when calculating what your monthly mortgage costs will actually be. When you look at houses on real estate websites, many will give an estimated monthly mortgage payment. It is very rare that these estimates will include taxes, and they never include insurance costs.
Assessed taxes, including county, municipality and school taxes, vary from state to state and municipality to municipality, and can significantly increase your housing costs each month. Be sure that you know the tax rates in the areas in which you are interested in buying a house. They will usually be published online as millage rates, or mils. You would multiply the mils by the assessed value of the home to find out what your taxes are.
For example, if the school taxes in your area are listed at 20.76 mils, someone in a house assessed at $100,000 would pay $2076 per year in school taxes and would therefore have to budget an additional $173 per month for school taxes alone.
Your home insurance costs will vary depending on the value of your home, where it is located, and the amount of coverage you are purchasing. According to StatisticBrain.com, the average home insurance rate in America is currently $794 per year. Your rate may be significantly higher or lower, but if you want to use the average, add in an additional $70 per month to estimate what you will need for your home payments. Or, if you prefer, you can contact a Trusted Choice® insurance professional to get a better idea of what your premiums are likely to come to.
If you are used to living in an apartment, your heating and cooling costs may not be very high. Apartments tend to be smaller in size and neighboring units can contribute to lower heating bills as you have fewer outside walls. Expect that when you buy a home, these costs will increase. Depending on the size of the home you buy, this added cost may be significant.
If you are currently looking at homes, you can ask the sellers for information about what they pay in utilities. Otherwise, you can ask friends or family what their costs are to get a general idea of what you will need to pay. Remember, the larger the house, the more you will likely spend. Also, while cathedral ceilings may look lovely, the can also significantly raise heating costs for those who live in cooler environments.
Remember that, as a homeowner, if a raccoon gets into your chimney or a major appliance breaks down, you will have sudden expenses that you will not have time to save up for. Some problems, such as hail damage on your roof or a frozen pipe that bursts and floods your house, may be covered by your homeowners insurance, but there many problems, such as a refrigerator that stops working or a termite infestation, that are not.
Some homeowners like to put a bit of money aside each month into a fund that they can dip into in situations like these. Others rely on home equity loans, lines of credit or financing to cover these added expenses. If you prefer to set money aside to build and maintain an emergency fund, be sure to add this into your monthly home-owning expenses.
Buying a house that needs work and renovating it into something that you love can be both fun and rewarding; unfortunately, it can also be very expensive. You are likely to run into a lot of unexpected problems and added expenses along the way. Many home renovations can be done slowly so you can stop work when funds are low, but if you are updating a kitchen or bathroom, you may want to complete the job as quickly as possible so that your house is functional as a home.
Make sure that you have a budget in mind for your home improvement job and try not to deviate from it, if at all possible. Also, add the money you are budgeting into your total home ownership costs when calculating how much you can spend on your house.
If you are purchasing your house with a spouse, partner or family member, you will likely be calculating how much you scan spend based on the total household income. But what if one of you gets laid off from your job? Or what if you have kids, and you decide that one of you should stay home with them?
Counting on more than one salary will necessitate that you continue to have more than one salary to pay future mortgage payments. You might want to play it safe by purchasing a home that you can still afford to live in if you or the person you are sharing it with is no longer bringing in an income.
Once you have determined how much you can afford to spend on a house, you can start the fun part, which is actually looking at houses to buy. By purchasing a house that you can easily afford, you can live comfortably well into the future. Be sure to share your experiences with us in the comments section.