How to Determine Your Home Buying Budget
The decision to buy a home is a big one, whether this is your first or third time.
In fact, there are few investments as substantial as real estate, so you’ve got choose carefully. While picking out properties in your favourite neighbourhood can be lots of fun, the really important stuff happens on paper.
So, if you already know where you want to buy, it’s time to do the maths and work out how much house you can afford. Ideally, you shouldn’t think about choosing your dream home design until you have a good grasp of your budget. That way, you’re guaranteed a speedy search, because you’re not wasting time checking out unsuitable options.
This guide to formulating a house-buying budget will help you come up with a ballpark figure.
The Rule of 28 (Mortgage Payments)
You can work out how far your money will go by using what is known as the ‘rule of 28’.
This states that monthly mortgage payments should not be bigger than 28% of your gross monthly income. This is your salary before taxes. For instance, if you have a combined annual income of $80,000, mortgage payments should not be any larger than $1,866.
The Rule of 40 (Debt Payments)
The next helpful sum is called ‘the rule of 40, ’ and it ensures that you can afford proposed mortgage payments, even while paying for other existing debts. So, take any student loan payments, auto loans, and credit card payments. Add the sum that you pay out monthly to the proposed monthly mortgage fee.
This figure should not be any bigger than 40% of your gross monthly income.
It is an important calculation to make, because it accounts for all of your debts, as opposed to just what you’d be paying out for the house. For instance, if you are paying off quite an expensive car, you might need to buy a slightly smaller property.
The Rule of 32 (Housing Payments)
Finally, the ‘rule of 32’ collates all of the payments you will have to make on the new property. You need to add the monthly mortgage sum to the homeowner’s insurance, private mortgage insurance, and any association fees, and property taxes. When combined, they shouldn’t be any bigger than 32% of your gross monthly income.
How to Get a Ballpark Budget
Now, that you have a general idea of how big your monthly mortgage payments can be, you can start to pick out properties in the right price range. Do be cautious though, because you need to know the interest rate before you can pinpoint an exact budget. There’s nothing to stop you working with an estimate though.
For instance, imagine you were to take out a thirty year fixed rate mortgage, with a 6% interest rate. The payments would be around $650 for every $100,000 on loan from the bank. Now, if we go back to that model income of $80,000, the rule of 28 would still restrict the maximum monthly fee to $1,866.
You probably want to incorporate any down payments that you’re going to be making.
For most buyers, this is usually between 10 and 20% of the asking price. Combine this figure with the maximum mortgage amount, and it will help you get closer to that ballpark budget. One thing to remember is that down payments of less than 20% may carry obligatory PMI.
The earlier you can do these sums and come up with a realistic budget, the easier your house-hunting journey will be. Searching for a first house is a daunting prospect, and it helps to have as much information as possible. If you’re determined to build a brand new home, you are strongly advised to work closely with one design company from start to finish.