All of us have been guilty of purchasing something that might not be a necessity for our daily living.
Maybe we did not need that new entertainment system, or his and her jet skis, but sometimes you just have to live right? Correct. But purchasing a new home is a more intensive process and not one you should treat lightly. Doing so could put you at risk of the possibility of becoming house poor – an unenviable situation in which you can afford your residence and little else.
Budget wisely when making a home purchase.
When you are house poor, you’ll have to commit the bulk of your income toward your mortgage. This can place a burden on the ability to purchase groceries, gasoline, and other necessary costs. You won’t have enough left over to enjoy a meal out or other personal expenses. More seriously, your housing costs may be enough that you can’t put aside enough savings to boost your retirement account or create a cushion for unforeseen home repairs.
Before you commit to buying a home, be sure to line item your mortgage in your monthly budget.
Your monthly payment won’t just be limited to the mortgage principal and interest. You’ll need to also consider homeowners insurance, property taxes, private mortgage insurance, and home maintenance expenses. You should also consider whether any of your other monthly expenses will change when you move into your new address. What are the utility costs for your new property? Is the location of your new home put you at a longer commute to work? Be sure to factor even those extra costs as they add up quickly.
Use only your reliable income when creating your monthly budget.
Do not factor in overtime pay. Do not factor in future work opportunities from new clients if you are self-employed. Since neither are guaranteed, you do not want to place yourself in a bind – should they not come to fruition. Decide how much of your income you are comfortable with putting toward your home. Here at Fairway Independent Mortgage Corporation, we suggest your mortgage payment should not be more than one-third of your income. The rule of thumb for housing expenses is that is should fall between 25 and 45 percent of your income.
When you are pre-approved for a mortgage, you might be surprised to see how much you can borrow to buy a home. However, calculating the actual cost of a home will give you a better idea of what you can afford. Do not borrow close to the maximum. Try to borrow in the mid-range. This will allow you to have some extra money for other needs as they arise. In other words, be sure to leave enough funds for retirement investments, vacation funds, college tuition, home upgrades, weddings, and so forth.
Create a Home Repair Slush Fund
Some of your income should be put aside for expenses related to the home. You should always save up for necessary maintenance and repairs. This fund will prevent you from experiencing a budget crunch when you need to fix the leaky plumbing or upgrade the roof. We typically suggest putting aside 2 to 5 percent of your home’s value each year to use for maintenance expenses.
Establish A Zero Interest Credit Line
Now that you have been living and enjoying your new home for more than 6 months, you may have already started to notice some of the items that will be needing repair. See if you can apply for a zero interest credit line to make home repair purchases. Err on the side of caution. Do not rack up massive debt in your credit line. You will want to be sure you can afford both the credit line and mortgage payments.
Budget for a job loss. Be sure to adjust for a lower income when deciding to purchase a home. You do not want to be in the predicament of a beautiful new home, and not enough income to support it. However, on the other spectrum, a job change or raise may put you in the pleasant situation of having more income than you did when you bought a home. In this case, do not be tempted to add that new addition you have always wanted just yet. Instead, place your additional earnings into a savings account.
Protect Yourself and Your Investment
Consider a home warranty as a safeguard against replacing appliances or other expensive necessities. Increase your savings or look for a more inexpensive home when making a home purchase. Michael Dunsky of Fairway Independent Mortgage suggests you save longer term so you can make a larger down payment, therefore lowering your monthly payment to a more affordable level.
If you follow these basic principles when you are budgeting for a new home, you can sit back and relax in that cushion you created against unforeseeable emergencies.
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