Home ownership is a dream for many, but the important thing to identify when you are looking to buy your home is to answer the question, how much house can you afford? Those who fail to plan ahead risk becoming “house poor”, which means that a very large portion of your income is being devoted to your monthly housing expenses.
Along with being a very stressful and unstable situation, being house poor can also prevent you from enjoying your private life and from being able to save for retirement or other major expenses.
Housing is one of the largest expenses in your budget, and once you take out a mortgage, you will have a huge liability for up to 30 years. Also, selling a house requires a lot of time and money – realtor fees can often amount to six per cent of the sale price, or more.
The decision you make in terms of your home purchase will affect your spending on all other expenses, as well as your future goals. Are you willing to sacrifice your education or retirement goals for a larger closet or granite countertops? Do you even want to mow a lawn or maintain that landscaping?
Budgeting for mortgage payments
Every home purchase decision should start with a budget. You need to know how much your bills will be, how much you will spend on your necessary expenses versus your discretionary expenses, and you need to be able to define your future goals.
Ultimately, the mortgage payment portion of your budget should not amount to more than 30 per cent1 of your total income before taxes, and 32-36 per cent total when including mortgage insurance, association fees, homeowners insurance, and property taxes. If you spend much more than that, you might be on the road to becoming “house poor.”
Planning for a down payment
In addition to your mortgage payment, you will likely need to make a down payment on the home. How much cash do you have available to put down? Even though you might be able to obtain a mortgage for 90-100 per cent of the home purchase price that could be a sign that you cannot afford the home!
Aim to buy a home that is priced so that you can afford 20 per cent of the purchase price as a down payment. Not only will this help you start building equity in your home, but it lowers your monthly mortgage payment, and reduces the unnecessary expense of private mortgage insurance (PMI).
PMI protects lenders who offer mortgages to people who do not pay at least a 20 per cent down payment. Since those home buyers are more likely to default on their mortgage, lenders often require PMI to protect them.
Are you stressed just thinking about your future mortgage payments, landscaping expenses, utility bills, homeowners insurance, property taxes and the cost of furnishing the home? Then you should probably buy a less expensive house!
Working with a financial advisor to identify how much you can afford without interrupting your current lifestyle or future goals will help you rest easy, and make sure that you have sweet dreams instead of staying awake with financial worries.
Remember that as a Foresters member you have access to Everyday Money, our toll-free financial helpline that connects you to an accredited counselor who can help answer your questions about your personal financial matters such as debt management and budgeting. Visit MyForesters.com for more information and resources.
1. Percentage of housing expense may be less of more, depending on your unique situation and other factors such as cost of living and consumer debt load. Based on generally accepted financial counselling principles.
415261 CAN/US (06/17)