With real estate being so costly, the value of a home can often be overwhelming. With the rising cost of inflation, even basic starter homes can go for a quarter of a million dollars (especially in the more expensive areas). Plus, you might want a home slightly larger, or with some extra features such as a balcony or fireplace but in the end you have to ask yourself, can I really afford that?
How Much Mortgage Can I Afford?
As you can see in our Creating a Personal Budget by Income Ratio article, your mortgage expenses shouldn’t be over 30% of your net income. This includes only your mortgage; keep in mind that your utilities, insurance, condo fees, property taxes etc will be extra. So basically, if your net income (your income after taxes) is $3000 per month, your mortgage shouldn’t be over $1000. The problem with this is that most real estate buildings with a mortgage of under $1000 tend to be sub-par, especially in the more expensive locations. So how can you get a nicer place without going over your budget of 30 percent? The first thing you can do is split the cost of a mortgage.
Splitting the Costs of a Mortgage
One of the best ways to afford more is to split the cost with one or two other people. Generally, splitting such a hefty investment works better by splitting it only with one person since they are more likely to agree on what needs to be done (house rules, renovations, decorating, whether or not you want animals etc), but splitting a mortgage with more than one person has been known to work as well.
The most important thing to remember when deciding whether to split the mortgage or take it all on by yourself is that you will be “stuck” with the person you choose until the house is sold. This isn’t a renting situation where one of you can move out if you get into a fight; buying a home is a rather permanent investment so choose carefully. This is why most mortgages are split between a husband and wife, or other members of the family such as brother or sister.
Putting Down a Bigger Down Payment
Another great way to be able to get the house you want and the mortgage you can afford is to put more money down up front. If you want a home that costs $300,000 and you can only get a $230,000 mortgage, it might be a good idea to put down a $70,000 down payment. This will also help save you money over the long run with interest, plus if you have more than a 20% down payment, you won’t have to pay PMI (Private Mortgage Insurance) which will save you even more money. The down payment has a direct impact on your mortgage payment and as such, larger down payments allow buyers to purchase more expensive homes.
This has been a very simple scenario up until now but there are also other factors involved in your mortgage payments worth considering. First of all, consider the length of time for your mortgage. The longer you stretch out your mortgage, the lower your monthly mortgage payments will be. For example, if you have a mortgage of 30 years, your monthly mortgage payment will be much smaller than if you have a mortgage payment of 15 years (given the same mortgage value). It also makes a big difference how often you will be paying your mortgage. For example, you will have to pay less interest and actually end up paying your mortgage off faster if you make your payments every two weeks instead of on a monthly basis.
Before deciding how much of a mortgage you can afford, make sure to add in any debts as well. Not only will it be more difficult for you to make regular mortgage payments if you are drowning in debt, but being in a lot of debt can also drop your credit score and make it difficult for lending institutions to approve you for a mortgage in the first place. Before adding in a permanent monthly bill, make sure your debts are manageable and if not, pay them down before you even start to save up for a down payment.
It is important to keep in mind that you need to put away a little bit extra each month to pay for any repairs and/or renovations that may take place. These maintenance costs can come out of nowhere so it’s important to be prepared with a bit of an emergency fund. You might not have time to start saving when your roof needs repairing so it’s best to make a plan and put away some money each month in a separate savings account just for this. You should be putting away a minimum of $150 a month to this account; you might want to put away more if your home is more expensive. A financial advisor firm can help you plan for major fiscal expenditures like mortgages.
Getting More Mortgage Than You Can Afford
There are those individuals who, despite knowing what they can comfortably afford, go overboard and end up purchasing something far too expensive for them to be able to manage financially. As a result, the cost of paying for their mortgage, utilities, property taxes, maintenance etc is too much and they have little left over to take care of their other basic expenses. They believe that even though their home is currently taking up a very large percentage of their income, they will get more money down the road with raises, promotions etc therefore making it easier and easier to make the mortgage payments each month.
However, getting more mortgage than you can afford isn’t always the best idea; in fact, many financial advisors will recommend getting the mortgage you can afford now and buying more expensive real estate (or additional real estate) to expand your financial portfolio as you can afford it more. It’s easy to bet on the future since you don’t know what will happen, but consider the stakes if you bet incorrectly. You could lose your home, the very place you (and your family) live in should you miss a few payments because it was too much for you to handle.
In this situation it’s better to be safe than sorry. What if you lose your job? What if you need to buy a new car? What if costly unexpected expenses pop up which end up taking a large chunk of your income, such as medical bills? If you take out the absolute amount of mortgage you can without going bankrupt and as a result you barely have your head above water, what will happen if your expenses change? These things do happen and you have to aware and prepared for it.
There is also the matter of how long you intend to keep the mortgage. Some people like to have their house paid off as quickly as possible, whereas others tend to take their time, even borrowing against their home and refinancing it to afford a nice vacation, new cars etc. Are you planning to make serious renovations to the house and perhaps flip it when the market is good in order to turn a profit? If this is the case, you will generally be able to afford the mortgage (especially if it is quite run-down), but you have to factor in that you will be putting in your time and effort instead. As such, the shorter your mortgage is, the more likely you are to profit when you sell it, since a large portion of the house may already be paid off.
Buying a new home (especially your first one) is always an exciting adventure. You get to look around, see what fits your budget and what fits your lifestyle and ultimately decide on something that suits you. While you may have the mortgage covered, you need to remember your monthly maintenance fund as well as your property taxes at the end of the year. It is possible to add in your property taxes right in your mortgage so you end up paying monthly payments instead of one large sum at the end of the year. This can be much easier for many people to manage financially so play with your options and see what works best for you. Remember that you will have this home until you sell it, so be sure to calculate the numbers and find out exactly how much mortgage you can afford before making a purchase. By making an informed decision, you will be able to have the home of your dreams without compromising your financial future.