Stretching your budget too much could have serious consequences.
- A recent survey reveals that a quarter of homebuyers would go way over budget to buy a home.
- It’s a good idea to keep your housing expenses to 30% of your income or less, and that means not spending too much on a house in the first place.
Finding the perfect home is a difficult thing to do in a normal housing market. But in today’s market, it’s even more difficult.
Housing inventory has been extremely limited for over a year. Homebuyers increasingly have to compromise on what they want, whether that means settling for a smaller home or an outdated one. But some buyers may seek to compromise in a different way – by spending more than they originally planned.
In a recent HomeAdvisor survey, 63% of respondents said they would go over budget for the perfect home. But 25% say they would $100,000 on budget for the perfect home. This is a mistake that could have very bad repercussions.
How much should you spend on a house?
As a general rule, it’s a good idea to keep your monthly housing costs at 30% of your net salary or less. And by “monthly housing costs,” we’re talking about all the foreseeable costs, like your mortgage payment, property taxes, home insurance, and HOA fees, if any.
If your housing costs exceed this threshold, you may find it difficult to track not only home-related expenses, but also your expenses across the board. If you go anywhere in the range of $100,000 over your budget when buying a home, you could be putting yourself in a really tough financial spot.
Imagine you have $50,000 down on a house. Using a mortgage calculator, you can budget for a home purchase of $250,000. If you are able to obtain a 30-year mortgage at 3.5%, you will be entitled to a monthly payment of $899 for principal and interest on your home loan.
Now let’s say you decide to stretch your budget and buy a $350,000 house instead. All things being equal, you will be entitled to a monthly payment of $1,348 for principal and interest. That’s $5,388 more per year just for principal and interest. And that extra sum could be enough to push you into unhealthy debt, even if you manage to meet your mortgage payments on their own.
That’s why it’s so important to set a home buying budget and stick to it, even if the perfect home strikes you one way or another. Or, if you’re going to go over budget, do so in moderation if there’s a compelling reason.
In some cases, being a little flexible with your budget might make sense. Imagine setting a limit of $250,000 to spend on a house, but finding a perfectly good house for $265,000. If spending an extra $15,000, which you’ll pay back over what could be 30 years, saves you a slew of potentially expensive maintenance and repairs, it might be worth going a bit over that limit. But there’s a big difference between adding $15,000 to your mortgage and $100,000.
Don’t make a decision you’ll regret
While going way over budget for a house doesn’t push you into debt or fall behind on your financial obligations, it could create a situation where you’re “housing poor” – it that is, you spend so much on housing that there is little left over for other things that could improve your quality of life, such as hobbies or vacations. That’s why you’ll need to be mindful of what you’re spending on a home, even if it means giving up what seems like the perfect place for you.
A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage
Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.
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