Purchasing a home is the largest financial decision that most people will ever make. According to Consumer Reports, many Americans qualify for larger mortgages than they can actually afford. If the bank pre-qualifies you for a loan, does it mean you should take it?
Many financial planners recommend limiting the amount you spend on your home to 25 percent of your income.1 However, the Bureau of Labor Statistics says the average couple spends over 31 percent of their income on housing, while single people exceed 36 percent.2
When considering the purchase of a home, there are several options you should consider:
- What is your total monthly mortgage amount?
- Do you have a minimum of 20 percent to put down? This will help you avoid paying Private Mortgage Insurance (PMI).
- Does your total payment include property taxes and homeowners insurance?
- Will you finance a 15-year, 20-year or 30-year mortgage?
- Do you have enough money saved to cover unexpected homeowners’ expenses?
Make sure you understand what your monthly payment is comprised of — is your payment escrowed and already includes property taxes and homeowners insurance? Or will you have to pay this separately? Will you have homeowners’ association dues?
Ideally, you should purchase a home when you can meet the following factors:
- Make a minimum of 20 percent for a down-payment
- Finance a 15 or 20 year mortgage
- Keep your total payment below 25 percent of your take home pay
- Have money in savings to cover unexpected homeowners expenses
Although purchasing a home is the American dream for some, it should not come at the cost of your financial peace of mind. It’s better to wait before purchasing a home if it means buying a home that you can’t afford right now. The key is to weigh all of your financial considerations prior to making a home buying decision. If the benefits outweigh the costs, move forward and enjoy your new home with peace of mind. If not, it’s okay to wait.
Sources:
1 Here’s How Much Mortgage You Can Actually Afford https://www.consumerreports.org/mortgages/how-much-mortgage-can-you-afford/
2 Bureau of Labor Statistics https://www.bls.gov/news.release/cesan.nr0.htm