How Much Should You Spend On A House?
The most important deciding factor of your home search will be based on price. If you want to know how much you should spend on a house, you should figure out how much you want your total monthly housing expense to be. This is the most important part of the process for buying a house. This is the very first thing you need to explore.
You want to determine right away how much house you can afford COMFORTABLY. There are many people who get pre-approved for a loan, but that does not mean that should be your intended purchase price. Many people look at their pre-approval letter from their lender and don’t ever question how much that loan costs per month. There is no right or wrong answer as to how much should you spend on a house, it’s up to you.
How Much Should You Spend On A House?-Work Your Budget
My best advice to determine how much you should spend on a house should be based solely on what you intend to allocate towards your TOTAL monthly housing expense. There are other costs to homeownership in addition to the monthly mortgage. As a potential homebuyer, it’s VERY IMPORTANT you understand all of those costs in addition to your closing costs so that you can determine an official price point you feel comfortable with. It’s not fun to be house rich and cash poor hence my reasoning to establish a comfortable monthly payment up front. This is one of the first conversations you should have with the real estate agent you hire.
Breakdown Of Your Total Monthly Payment
How Much Should You Spend On A House?
1.) Principle and Interest! The first step to figuring out how much should you spend on a house is to come up with your desired monthly mortgage you feel comfortable paying. This is what you are paying the bank each month. Your mortgage is based upon your monthly interest and principle paid each month.
At the beginning of your loan you will pay much more towards interest. As your loan matures in time you will slowly start to pay more on your principle and less on the interest. Your monthly payment should never change. For example: if you are paying $1500.00 a month towards your principle and interest, you will always pay that monthly amount for the term of your loan. The only thing that changes each month is the dollar amount allocated toward principle and toward interest.
30 Year Fixed Mortgage, 15 Year, or ARM’s
Another thing that might help you figure out how much should you spend on a house is to determine how long you plan on living at that house. A home buyer can take out a 30 year fixed mortgage, 15 year fixed mortgage, or an ARM(adjustable rate mortgage). There really is no right or wrong answer other than it’s just preference. Most buyers take out a 30 year mortgage. The interest rate that you lock in at will not change during that time frame. If you hold on to this property for 30 years the property would be paid off. It’s a safe bet.
We meet with potential home buyers everyday. Just about every single one of them are unsure as where to start with their home search. Please take note that your loan amount determines your monthly principle and interest payment and not your purchase price. Once you determine what you comfort level is in terms of total monthly payment you can then start getting an idea of where you could live.
2.) Annual Property Taxes! When you own real estate you will also own a tax bill. The real estate tax bills will be a HUGE factor in determining how much should you spend on a house. Your real estate taxes should be considered in your total monthly payment.
Most people choose to escrow their taxes. This means that they pay their annual tax bill on a monthly basis with their mortgage payment so that when the taxes come out, they are paid by their lender or servicer. Your lender will escrow the money set aside for taxes and when the bill comes due they will pay it for you. It’s a very good way to budget yourself. I highly recommend escrowing your taxes so that you are not surprised when the tax bill comes out. Taxes come out two times a year or in two annual installments. You can also have the option of not escrowing your monthly real estate taxes if you put down 20% or more on a house. You will owe two lump sums throughout the course of the year if you choose this option so make sure you save for it!
3.) Monthly Homeowner Association (HOA) Dues! If you are buying a condominium, town home, or property with some kind of association you will have a monthly homeowner’s association fee to pay. HOA dues are monthly fees associated with the condo or town home complex you are buying into.
HOA dues typically cover water, common area insurance, common area expenses, building maintenance, building staff, and possibly some utilities. You should confirm what your HOA dues cover, but it is important to take note that this should be considered part of your monthly housing expense. If you don’t pay your HOA bill you can expect the association to take possession of your unit. It is very important that this bill be paid on time to avoid late fees. Figuring out how much should you spend on a house CAN BE determined by the type of property you are buying. A condo with higher HOA dues can decrease your purchase price if trying to stay within a certain budget. A property with no association dues can allow you to increase your price and still stay within your intended monthly budget.
4.) PMI! Private mortgage insurance will take place anytime you have less than 20% down payment on a house. There are a few alternatives to PMI payments, but you would have to discuss that with your mortgage broker or lender. Private Mortgage Insurance insures the lender in the case of buyer default. The dollar amount associated with paying PMI is based on your total loan amount, credit score, and loan to value on the property you are buying. If you are putting less than 20% down on a new home you want to make sure you you check with your lender what your monthly PMI charge will be estimated at. There are alternative programs to avoiding PMI, but you should consult with your lender on the exact details of those.
How Much Should You Spend On A House Conclusion
Breakdown the TOTAL monthly payment first and then find a price point. Make sure that you know your total housing payment you feel comfortable with and then you can reverse engineer that purchase price to something you feel good with. Just know there is no right or wrong answer on how much should you spend on a house other than that you are comfortable with it. Don’t forget to get an idea of your closing costs as well as factor in the tax advantages you may receive when buying a house.
If you are looking to buy a new home and want an aggressive bulldog Realtor, then check me out. I promise you nothing but the best results or I’ll literally help you move. It’s only a conversation and you can see if I know what I’m talking about.
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