Elder Financial Publication
A significant factor into the focusing on how much home you really can afford is determined by your own almost every other monthly installments. The amount of home Sam and you can Brittany are able to afford change dramatically if they have an automobile payment otherwise several, credit card debt, or student loans. Most house carry personal debt, therefore let’s hypothetically say they are doing also.
Sam’s monthly student loan payment is $450. This amount needs to be withdrawn from their monthly take home pay in advance of they determine the 25% payment.
$6667 (take home pay)
– $450 (student loan)
$6217 (new net)
X .25 (25% budget)
$1554 (the brand new month-to-month funds)
$112/month. This example shows us that the more consumer debt you carry the less house you can afford. Needless to say, there was a lot more to help you home ownership than just make payment on home loan.
Your monthly budget needs to cover at the very least your principal, interest, taxes, and insurance (PITI). Depending on where you’re hoping to buy some of these components you are going to impact your budget more than others. There’s a balancing act between each of these expenses. For example, some states have higher property taxes than others. In states like New Jersey, Illinois, or New Hampshire your property taxes will mean you can afford less house than in states like Hawaii, Alabama, or Louisiana. Insurance might also impact your monthly budget if you live in a state more susceptible to natural disasters. In Alaska or California you might need earthquake insurance. A Florida or North Carolina buyer might need flood insurance.
Finally, the last (major) consideration in your budget which is the condition of the home you’re hoping to buy. Maybe you want a new build? Perhaps you have an eye for old charm? Have you watched enough HGTV to think you can tackle a fixer upper? A new home might come with less monthly surprise expenses. It’ll likely be more energy efficient, it won’t need cosmetic upgrades, and the major appliances will be new. Of course anything can still go wrong, even with a new build. But your chances of needing to fund a major repair are significantly lower. If you’re hoping to buy an older home you might need to lower your budget to accommodate for repairs and updates. In addition, an older home might not be as energy efficient requiring you to plan for higher utility bills. Your overall budget should allow the use of 10% of your income for utilities. However, if your home isn’t energy efficient you might need to decrease your housing budget to increase your utility budget. Turning a fixer upper into your dream home will require significant cash flow. If you’re unable to cut other expenses from your overall budget you’ll need to lower your mortgage budget to accommodate. Home renovations can equate to major dollars.
Again, there is a balancing act between all of these expenses. You need to be aware of costs that might impact your budget due to type of home, geographic location, etc. Remember, the Ideal Budget is a guide. It doesn’t have to be followed to a “t.” But, changes to the Ideal Budget do need to be intentional. If you plan on increasing your housing budget know where you’ll need to decrease your spending to achieve a balanced budget. Once you’ve established a budget you’re ready for the next step:
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Location, location, location. It’s common knowledge that you can buy a lot more house in the midwest than you can in Manhattan. If you are living in a high cost city (think Portland, San diego, San francisco bay area) it’s not likely you’ll be able to keep your mortgage payment under 25% of your net income. The most important thing is that you understand this is a tradeoff. You only have so many dollars to spend each month and the more you spend on housing the less you have for other areas in your budget like food, entertainment, and transportation.