When you are thinking of buying a home, there is something daunting about setting your budget, especially as first time home buyers. Renting has less of a long term impact, because if your financial situation will be changing, you still have the opportunity to move out with relative ease and find a cheaper place to rent.
When it comes to buying a home, you’re stuck with it for the long run, and are subject to volatile markets and the potential for fluctuating interest rates and costly home repairs.
Here are a few tips for setting your housing budget when you buy your first home:
Err On the Side of Caution
There is plenty of advice out there that states that families should keep their housing costs around 30% of their income, but housing costs don’t just include the mortgage. You also have to pony up for repairs, maintenance, insurance (on a larger scale than tenants insurance) and a contingency fund. That being said, ensure that your actual mortgage is no more than 20% of your take home pay.
Analyze Your Situation
You may be a member of a dual income no kids relationship right now, but do you want children in the near to mid future? If so, you should be considering that when that happens, your expenses will increase. Also look at whether or not you are in a position to lock in for a 10 year interest rate, which is usually beneficial when the interest is low.
Things could change in an instant so being house poor can be very dangerous.
Test it Out
So you set a budget based on what you think will work for you. That’s a step in the right direction, but the next best step is to ensure that it will, in fact, work for you. Try “paying” the amount of your future mortgage, insurance, and maintenance that you would have to pay (and put the difference in a savings account). This will help you see wether or not you have settled on a comfortable amount.