Budgeting For Your Dream Home

This year has been defined by change. The novel coronavirus and resulting pandemic have caused many of us to rethink our living situations. As businesses and schools closed their doors, we’ve had to change our homes to be offices and classrooms.  Everything about how we use our homes has had to change and accommodate our evolving needs. Without a daily commute to work many families are looking at purchasing homes in the suburbs. Many want those homes bigger and better than ever. The extra room is desirable for many to have more multifunctional space to utilize for work, exercise, family, etc. However, when purchasing your dream home, it is important to understand what you can afford. Maxing out your budget can cause financial difficulties throughout the life of your home mortgage loan. Buying a dream home is as much about budgeting for your dream home, as it is finding it. 

Building a Budget

Figuring out how much home you can afford can be difficult. If you are married, be sure you go over the results with your spouse. You both need to be on the same page when it comes to your budget. Work together to figure out what you can actually afford. Step one is understanding your monthly income. Let’s say you bring home $2,000 a month and your spouse brings home $6,600 a month. Your total monthly take-home pay would be $8,600. In 2017, the median household income in Easton, MA  was $107,845. That’s approximately $8,987 per month. 

Most Financial experts recommend spending no more than 25-30% of your income on housing. If you are in a higher income bracket you may be able to fudge on this percentage a bit. The larger income gives you wiggle room for all the necessities you need like groceries. It also gives you cash for the extras like the long list of streaming subscriptions you forgot to cancel your “free trial” on.  However, it is wise to be careful and avoid buying more house than your income allows. So, if you have a household income of $8,987, your housing budget should be between 25-30% of that. For that household income, housing costs should not exceed $2,696 per month. That is $2,696 for all of your housing expenses, not just your mortgage payment. 

Budgeted housing expenses should include mortgage, property taxes, insurance,  utilities, and upkeep. All of the expenses of homeownership need to be factored into this number. When calculating what you expect to pay in these areas it is important to consider the possibility that costs, such as utilities, may go up over time.  Furthermore, it is advisable to have funds set aside for emergencies. These emergencies could be replacing an appliance that goes out or paying an insurance deductible after a disaster. 

Maximize Your Down Payment

The amount of your down payment has a big impact on how much home you can afford. The more money you put down, the less money you’ll need to borrow. If you have a down payment of less than 20% you will be required to pay PMI, which will also need to be factored into your budget. PMI (or Private Mortgage Insurance) is required on nearly every home loan in which less than 20% of the home has been paid for. This can be a serious chunk of money to pay every month if you are not expecting it.  Having a higher down payment may allow you to obtain more home while still maintaining a workable monthly budget. Plus, with a larger down payment, you may just be able to pay off your debt faster.

Closing Costs

Don’t forget to budget for closing costs. Your down payment isn’t the only cash you’ll need to save before buying a home. Closing costs can be heavy and need to be considered when selecting your home. Typically, closing costs amount to about 4% of the purchase price of a home. Your lender and real estate agent will let you know exactly how much your closing costs will be for your prospective home. The closing costs will need to be paid on the day you close on your home. 

Final Thoughts

When searching for your dream home, having a budget and working with what you can afford is essential. Buying a home outside of what your budget allows will not only create financial difficulties throughout the life of the loan but it could lead to you defaulting on your loan. If you need help making your own budget, please download this budget planner and figure out what you can afford. Know your budget and stick to It!. Streamline Realty is here to help. We look forward to helping you find your dream home for a price you can afford.