Buying too much house and getting in over your head can be a major financial mistake, but it’s an easy one to make.
Avoid this threat to your future by knowing exactly what you can comfortably afford and then making a wise investment.
What Can You Afford?
Before you ever contact a realtor or set foot in an open house, take the time to find a price range that's realistic for you. Set a house-buying budget by factoring in these things:
- Your income
- Your other assets and investments
- Your other debts and liabilities (car loans, student loans, etc.)
- Other large expenses looming (starting a family, starting a business)
Use MAX’s loan calculator to help you find the monthly house payment you can afford.
And don’t forget about these one-time expenses and other monthly expenses related to buying a house:
- Down payment.
- Closing costs. This payment is due when you close on the house and usually includes the appraisal as well as title fees and loan origination fees.
- Moving expenses.
- Any updates or repairs you’ll want or need to make at your new house and purchases like new appliances.
- Homeowners’ association fees or dues (if the neighborhood you’re moving into has one).
- Increased utility bills (water, gas, electricity).
- Home care and maintenance (landscaping, lawn care, etc.)
How Much Should I Pay?
Just because you can afford a certain amount doesn’t mean you have to spend that. Even if you have the funds for a higher monthly payment, if you pay more for a house than it is worth, you’ll probably regret it. To make sure you don’t overpay, do your homework. Find out:
- The recent selling prices of other houses in the neighborhood and area.
- How the other houses in the neighborhood are maintained. Look for nice, manicured lawns and a high level of home ownership (vs. renting) in the area.
- What school systems, churches and desirable amenities are nearby.
- Crime statistics, possible zoning changes and other things that can affect the house’s long-term value.
- If you’ll need to put more money into the house for updates or repairs and how much.
Working with a realtor can make this process easier. They can get you the needed historical data for other houses near the one you are interested in (called a “comparative market analysis”), which can help you determine if the house you’re looking at is a good value and if it is likely to increase in value over time.
How Much Should You Put Down?
For most home loans today, a down payment of some amount is required. It can be as little as 5 percent or as much as 20 percent of the price you’re paying for the house. But you can always put down more than the mandatory. To determine how much you should put down, think about:
- The more down payment you make, the less you need to borrow, making it possibly easier for you to get a loan and meaning you’ll owe less (and thanks to interest) end up paying less for your home.
- A larger down payment may help you score a lower interest rate on your loan.
- If you put down less than 20 percent, you’ll probably have to pay for private mortgage insurance (PMI), which is an extra cost for your home ownership.