Often, when we start looking for a home, we get hung up on the price of the home, and wondering how much we can afford in terms of the total price of the home. Indeed, it’s very easy to get hung up on a number like $200,000, and forget about some of the other costs associated with owning a home.
Before you decide on a big number, instead look at how much you can afford each month. And realize that the cost of homeownership doesn’t stop at your monthly mortgage and interest payment. Some of the additional costs of home ownership include:
- Maintenance costs (including lawn care and other items)
- Property taxes
- Utilities (if you are moving into a bigger house, you will likely have higher bills)
- Home insurance costs (you might also need umbrella or personal liability insurance)
You need to estimate these costs before you start thinking about shopping for a home. Also, realize that your interest rate will affect how much you pay each month.
Consider What You Can Afford Each Month
Before you begin your house hunt, think about what you can afford to pay each month on housing costs. The rule of thumb, of course, is something like 30% of your monthly budget should go to housing costs. (Personally, I think total housing costs should be capped at 25%, and mine are more like 20%.) There are calculators that can help you estimate various costs of home ownership, on top of the traditional principal plus interest payment. It’s a good idea to build these costs into your estimate.
Once you know how much you can actually afford to pay each month, you can use that as a basis to look at the price you can afford to pay for a home. You want to make sure that your payment fits comfortably into your budget. You want to make sure that is room in your budget for setbacks. Build up an emergency fund, so that you are prepared. If your cost is too high, and it prevents you from making your mortgage payments, you could face foreclosure and losing your home. This risk makes it clear that you need to be prepared for that sort of setback.
What Can You Afford, Anyway?
You do need to be realistic about what you can afford, however. Sometimes, it’s easy to think that you can stretch to make the payments on a home, and that you can afford something bigger. However, if you have to stretch, you might not be able to afford it. Also, realize that the interest that you pay has a lot to with your monthly cost. You’ll need to know how your credit score is going to affect matters, since that can add to your monthly cost. If you have poor credit, you might be better off waiting until you improve your score before you start applying for mortgages. You’ll get a better interest rate, and a lower payment.
Be honest with yourself. Do the research. And only buy what you can afford.