Trying to come up with a home budget is extremely difficult, and it can leave many upcoming buyers frustrated and confused. How much is too much? Is there a bottom-level that we should be aiming for? What is the most we can spend? Finding the right answer includes so many variable that people often leave it to the “experts” to determine a budget for them.
But you need to make the decision, and that means taking the time to understand home values, your personal income, your overall debt load, and many other factors.
Lots of homebuyers, especially first-time buyers, don’t put enough consideration into their home budget, which means they can end up with a home that stretches their finances too far. In some cases, they could under-spend and not take full advantage of their entire income.
If you understand the basics of mortgages and home values, you’ll be able to select the right price range for your purchase. In the end, the decision involves not just financial figures, but personal thought.
How Much House Can You Afford? Asking the Right Questions for the Best Results
How Much Can You Spare Each Month?
Before thinking about personal and emotional decisions, you need to take a hard look at the numbers. Start by understanding how much you earn each month and how much you spend, and take the time to actually research and write these numbers down, as they may be different than what you think. (Especially your monthly expenses!)
Take a look at your bank account and calculate all the expenses for a full month. You may want to do this for two or three months to understand your full expenses. (This is also great for your finances, as you may discover some unnecessary spending habits that you could change.) Your calculation on expenses should include car payments, insurance, groceries, entertainment, credit card payments, and all other expenses that you incur monthly. If you are paying rent, you can exclude that number, as the rent checks will stop when you own your home.
Now subtract these monthly expenses from your monthly take-home pay. Take-home simply means your income after taxes. This is the money you have left, but it may not be the specific total you want to use on your mortgage. You’ll want to leave a little wiggle room for savings and other expenses, it’s rarely a good idea to spend every last penny on your mortgage loan. Expect to leave at least $500 each month for flexibility and financial stability.
What Loan Term Do I Want?
Part of how much house you can afford will also depend on the loan terms, especially the length. The two most common lengths are 15 year and 30-year mortgages, and they deliver differing results in the total amount of borrowing money as well as the monthly payments. There are also 40-year terms that may be appropriate in certain situations.
If you are looking for the lowest possible payments, regardless of overall costs, then a 30-year mortgage is your best choice. Under these terms, the mortgage is spread out over 30 years, for a total of 360 months.
With a 15-year mortgage, the repayment is spread over a total of 180 months, which means higher monthly payments. However, because interest is added for a shorter period, the total amount for borrowing money is less.
According to BankRate.com, if you borrow $400,000 at 4.5% interest for 30 years, you’ll pay $2,026.75 per month. At the end of the loan, you’ll have paid $329,626.85 in interest, for a grand total of $729,626.85 for the home.
If you switch to a 15-year mortgage, leaving all other factors the same, you’ll have a monthly payment of $3,059.97, over $1,000 more than the 30-year payment. However, once the loan is paid off, you’ll have spent $150,795.17 on interest, making it far less costly in the long term.
You can see how the terms can make a difference, so you need to think about more than just the monthly payment when calculating how much you can afford in a home.
Am I Willing to Sacrifice Anything?
Finding the right mortgage is a push and pull of various factors. If you want a larger home, you may have to live in an area that is further from downtown. If you want a great school district, you may have to purchase a home with less bathrooms or a smaller kitchen. It’s all about priorities.
What do you value most in a home? Do you need space? Do you need to be close to work? Then flip it and consider the aspects that may not be important. Could you tolerate a smaller home? Are you fine with a long commute? Understanding what, if anything, you can sacrifice will go a long way in determining your overall budget.
Remember to Rely on Your Research, Not the Lender’s or Bank’s
While we are in the mortgage business and always strive to provide useful, reliable information, we need to emphasize that in the end you need to make the choice on how much house you can afford. Even the best lenders won’t completely understand your priorities and goals, so you need to choose a budget before heading to the lenders office. Yes, you can get excellent advice, but it needs to be your decision, not the lender’s or bank’s.
So take the time to crunch the numbers, measure your downpayment, and prioritize your goals before seeking loan approval. By taking the time to research your budget, you’ll set yourself up for success at all stages of the home purchase.
Guiding You to the Right Mortgage for Your Goals and Budget
Want help selecting the right loan for your specific budget? Contact the team at San Diego Purchase Loans and we’ll make sure you have the right information for a confident, savvy decision.
Whether you need a small family home or want to purchase commercial property, our team will do what it takes to help you get the best possible terms!
“We’re loving our new place and we’re very pleased with how smoothly everything went through closing. Thanks for keeping us up to date on the possibility of refinancing at a lower rate; we trust your judgement as far as waiting until the rate is around 5% lower before we refinance. We’re very interested in pursuing that if rates drop to that level. Thanks so much for all your help and personal attention!”
I HIGHLY recommend Chad and his team.
Chad and The Chad Baker team really helped me from start to finish with my loan process. They were extremely responsive and provided me updates on a daily basis. I had a few personal issues that they helped me work through so I could get the best loan program and best rate. Very knowledgeable about the industry, rates and trends.I HIGHLY recommend Chad and his team. I’m happy to offer a reference upon request. Please ask Chad for my contact information.”
“This is the second time that I have worked with Chad (home purchase & refinance). He has become my subject matter expert and someone I depend on for all finance needs related to our home and real estate investments. My favorite things about Chad are his depth of knowledge, responsiveness, honesty and the great service he provides. I have referred countless friends and family of mine to work with him for no other reason than I know that he will treat them well and equip them for the best possible outcome. Chad will add tremendous value to any real estate transaction that you have and I am grateful to have him as a resource.”