You're finally ready to take the plunge and become a homeowner! But just how much house can you afford? Just because your mortgage lender approves you for a certain amount, you don't have to spend that much. You're the one that has to make the mortgage payment every month, so it should be one you can live with.
Here are some things to think about before you get to that final number...
Overall Cost of Living
Sure you might be able to afford a larger mortgage payment than what you're paying in rent right now. But don't forget you'll need to have an emergency fund in case the water heater breaks, your pipes explode (not as exciting as it sounds!), or you need some upgrades. You also have to factor in homeowners insurance (which will likely be added to your mortgage payment every month) and furnishing your new place.
Even if your new place is the same size as the one you were renting, you're going to want new stuff. Why? Because now it's your place.
Think about how all your monthly expenses are going to change when you're a homeowner. Homeowners have expenses that renters don't.
Do you love to travel? Are you an insatiable foodie? If you have expensive hobbies, or even reasonably priced ones, you’re going to need money for them. Would you rather live frugally in a larger home or spend more of your income on fun? Remember, your monthly expenses are going to be more than just your mortgage payment. If you love tennis, but you're paying so much for your home that you can't find money in your budget to replace the strings on your racket or buy a new pair of tennis shoes, you probably won't be happy.
Do you like to party? Partying at home instead of in a bar is definitely cost effective, but you better be able to afford to invite the neighbors, so they don't call the cops.
What does your debt landscape look like? It might seem like you have extra cash to spend on a home every month, or even that you could afford to buy a house for what you're already paying in rent. But would that money be better spent paying off student loans, credit card debt, or your car? Once you’re debt free (and have something in savings), being a homeowner will be a lot more relaxing, and you might even be able to afford more house.
How Much House Do You Need?
Do you plan on raising a family in this home or will it just be you? No one expects you to say exactly how many children you want and when -- and don't even try, because advice columns are full of questions from people who made definitive statements about that, changed their minds, and are married to someone who wants to stick to the original plan. Do you need a five bedroom house for a family of three or would you be more comfortable in something smaller? And we're not arguing with you: If you love to have houseguests, or if it looks like an elderly parent may have to move in with you sooner rather than later, you need more room.
If you buy just what you need, you'll be able to pay off your mortgage quicker, build equity sooner, and put more money into savings for the future.
Doesn't that sound like a nice plan? Your home should fit into your budget, not destroy it.