Buying a house is a huge investment. For many of us, it is the largest investment we will make in our lifetime. Maybe that’s a heavy realization, but nonetheless, an important point that needs to be remembered throughout the home-buying process.
If you’ve decided to buy a house, that means you’ve already eliminated the possibility of renting and now it’s time to determine which house is right for you. But before the hunt begins, there is one very important question you need to ask yourself—how much can I afford to spend on a house?
Estimate Your Budget
Before sparkly, over budget houses start being dangled before your eyes and you begin making rash sacrifices (we don’t really need to put a table in the dining room… I mean, look at these vault ceilings!), you need to make a solid assessment of how much you can spend, set a price range, and stick to it.
A simple way to get a ballpark number of your budget is to take your monthly income and calculate 28 percent of that number. According to The Wall Street Journal, this is what most lenders suggest as the maximum you spend each month on your mortgage.
That number might seem smaller than what you imagined, but when you take into consideration your monthly expenses (car payments, cell phone bills, Internet and TV costs, gasoline, and groceries) that number might be closer to what you can afford on a mortgage than you think. No one wants to end up with a house without furniture or a pool without water, so to avoid finding yourself way over your head, you may want to listen to the pros—and your calculator.
Utilize a Mortgage Calculator
A mortgage calculator will factor in how much a bank is willing to loan you and how much money you are able to put down. This will help you get a better idea of how much home you are actually able to afford. Think of it as a fancy, free way of analyzing your finances.
A calculator determines a price by not only taking into consideration your income but also regarding how much debt you currently have, the length of the loan you are looking into, and the available interest rate. Introducing these specifics to the equation may land you at a number different than your earlier estimate, but will likely give you a more accurate reading of what price range you should be looking at.
Don’t Be Surprised by Hidden Costs
Many home buyers forget to take into account all the little costs than can add up to one very shocking number. Everything from additional fees and closing costs to the expense of hiring movers should be taken into consideration. Do you plan on putting down new flooring? Ripping down the kitten print wallpaper in the second bathroom? These expenditures, which may seem small and insignificant in foresight, can make a substantial difference when added together.
Be prepared by getting an idea of additional costs ahead of time and tacking them on to your total. If the cost of the house seems less realistic than before, you need to reevaluate what you can afford to spend on the property alone.
Hiring a home inspector can also help put into perspective the amount of fixes the house will actually require and how much money it will cost to cover them. A home inspection is different than the home appraisal your bank will conduct. An engineer should administer this inspection and determine any potential repairs. CNNMoney suggests hiring an engineer that has experience doing home surveys in the nearby area to get the best evaluation.
Consider all factors
Aside from your financial situation, there are other components that may influence how much you spend on a house. Take these points into consideration before deciding on a final number:
- Current market situation: Is now the time to buy? Should you move quickly or wait for a drop in prices?
- Resale value: How much are nearby homes valued at? Does the neighborhood and area have attractive benefits, such as good schools, which will help maintain the home’s worth?
- Likelihood of remaining in the home: How many years do you plan on spending in this house? Is there a possibility that you may take a job in another city in the future? Is this a starter home that you see yourself growing out of in a few years?
Answering some of these questions will help you determine how much of an investment you should make. For example, if you are considering this house a starter home you may not want to deplete your finances and spend your max. It may hurt you in the future when you’re looking into purchasing a new home.
Speak with a Professional
At the end of the day, you will want to speak with a professional that can help you determine all the hard facts. A real estate agent will help you find a home that fits your needs and a representative at your bank can consult with you on loan options and interest rates.
But don’t go in empty-handed. Knowledge is power and the more you know the more able you are to help yourself find the best home. Don’t let anyone coax you into a decision you’re not comfortable with. You have done your research and, most importantly, you know yourself. If something seems out of your budget, it probably is, and if a home seems too good to be true, it just might be.
