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There are many variables involved with buying a home. None of these is more critical than figuring out how much you can safely afford for monthly housing costs.
One of the worst feelings in the world is buying a home you love, only to become “house poor” for one reason or another.
In some cases, you can safely stretch your budget, but this is a decision you shouldn’t take lightly. Discuss options with your spouse, consult lenders, and use a good mortgage calculator to help you find that sweet spot that balances your desires with reality.
A Good Rule of Thumb
A good rule of thumb is that your housing costs, including your mortgage payment, property tax bill, homeowners insurance, and any other recurring and predictable monthly expenses, should not exceed 30% of your take-home pay. Stick to that limit, and you’ll likely be able to manage housing costs and all of your other monthly bills.
Reasons to Stretch Your Budget
Depending on your situation, it may be worth the gamble to stretch your homebuying budget.
Lowering Other Expenses
Sometimes, moving can reduce other expenses to bridge a stretched budget. You may cut down on commuting costs, make do with one car instead of two, or drastically reduce daycare expenses if your children are entering public school.
The Potential for Increased Income
Conversely, if your career is taking off, you’re in line for pay bumps, or you’re qualified for a better job, you may feel confident that added budget wiggle room is headed your way.
If this is the case, consider an interest-only loan.
It delays payments on the principal during the early years of the loan, giving you much lower monthly outlays. Theoretically, when your ship comes in, you’d have the paycheck to match the deeper financial waters you’d be navigating when principal payments kick in.
How Long Are You Planning to Stay
The amortization on a house, provided you get a fixed-rate loan, will not change, giving you a nice hedge against inflation. In theory, you’ll eventually earn more money in your career while your loan payments remain the same.
Chances are also good that you’ll grow into the space of a bigger house. With added elbow room, you won’t have to move anytime soon. That will save you big bucks on moving expenses and fees for a new home mortgage loan in the future.
» MORE: See today’s refinance rates
Reasons Not to Stretch Your Budget
Your home costs don’t stop when you buy a home. They’ve only begun. You must be prepared for ongoing maintenance and emergency costs and set aside dedicated funds to cover those eventualities.
Living paycheck to paycheck causes unhealthy stress levels and anxiety, while living well within your means has the opposite effect.
Here are some reasons to stay within a comfortable budget.
Less Maintenance Costs
A smaller home means smaller upkeep costs, even for major expenses, like replumbing or putting a new roof on your home, which cost less when you have a 1,500-square-foot home than a 2,500-square-foot home.
More Money for Other Uses
A smaller housing cost footprint means more money toward college expenses for your children, vacations, stashing more away for retirement, a better car, and other discretionary lifestyle choices.
The more money you can set aside, the more peace of mind you can have now and well into the future.
Less Mortgage Stress
When you cut it close with your mortgage, you’re gambling that everything will continue to work out with potentially outsized payments for several years in the future. If you’re living at the top end of your housing budget, what happens if you lose your job or fall sick to a major illness?
Be good to your mental health by keeping your housing costs reasonable.
Live in a Better Location
You may be presented with buying a big house but in a substandard neighborhood. Instead, consider buying a smaller home in a better place with less crime, better schools, and a nicer quality of life.
Alternatives If You Don’t Stretch
There are some options if you decide to stay within your budget. Two of the most sensible alternatives are pausing your home search or readjusting your search criteria.
However, if you sit out for a while during a rising market, you could be further priced out of the housing market. But if you need more time to save, this may be an appropriate course.
Rethinking where you can afford to live and the amenities you want in a home are better approaches. Look at less popular neighborhoods, try to spot those that are up and coming, or go in with a mindset that you can always move up in a couple of years when you’re better equipped.
You may also do with less square footage or a home needing repairs instead of one in move-in condition.
You may need to get creative with financing or borrow from friends or family to create a bigger down payment to bridge the gap between what you want and can afford.