How much can I spend on my new house?
What you can afford to spend and what you might be able to buy may or may not match up. We’ve all heard the term “house poor”. That’s not really a fun place to be. Goodness knows we’ve all gotten used to staying home all the time, but when the world is virus-free, it’d be good if you could afford to do something besides paying the mortgage.
In mid-2020, the average price of a new home in the United States hovered around 360K … the law of averages tells us some people pay a heck of a lot more than that and others pay much much less. No matter the house you buy, or even in what price bracket, a home purchase is very likely going to be among the largest expenditures of your life.
So, where is the sweet spot?
Your pre-approval letter might create some excitement. When shopping for a home, you have no choice but to factor in all your expenses.
Just a few things to consider when figuring out the cost of a house payment:
- Homeowners insurance
- Mortgage insurance
- Student loans
- Car payments
- Credit Card debit
- Personal loan payments
Of course, this list doesn’t account for health insurance premiums, groceries, and household supplies, or commuting costs for work. It’s a good idea to look through your bank statements and see where the outflow of funds goes.
Once you have a handle on your expenses, you can better determine what a comfortable house payment will be.
There are terms your lender will throw around like “debt-to-income ratio”, and generally you’ll need your debt to be well under 43% of your income.
Many homeowners avoid high mortgage rates and monthly payments by paying at least 20% down on their new home. Talk to your financial advisor about the pros and cons of lump sum down payments before you make that decision, and don’t forget you will very likely need cash on hand the day of closing.
Learn about getting approved for a mortgage here