As a Realtor® who frequently works with first time home buyers, I often hear a recurring question; “Should we go to the top of our bank pre-approved budget, or stay below our ‘maximum’ budget?”
I wish there was a simple, black and white answer, but unfortunately, it’s not so straightforward and the answer really depends on who you are and what your situation is.
Here are some things to consider:
Get a clear picture of your finances. Calculate your total take-home pay after tax deductions and contributions and add other sources of income such as government payments and spousal or child support.
Calculate the total monthly costs of homeownership:
- The first calculation to consider is the total mortgage payment plus the cost of borrowing (interest). Plug in differing house prices in a simple mortgage calculator to see the varying monthly costs.
- Add property taxes and condo fees if they apply. These can easily be found on each listing.
- Other home ownership costs include things such as the hot water tank, furnace, and water softener rental or maintenance fees. Whether these fees apply and how much they amount to will depend upon on whether the appliances are owned or rented and the service agreement that is attached to them.
- Utility costs will vary significantly, depending on the size of the house; whether it shares walls with other units, the heating source, as well as the age and construction of the home.
- Maintenance fees are another cost of owning a house. This includes everything from salt for the water softener, to larger upgrades and repairs. Although these can be one time, lump sum expenses, it is a good idea to put money away each month to cover minor and major expenses as they come up.
- House insurance is mandatory when financing a home purchase. Prices increase as coverage increases, as well as factors such as having an apartment or fireplace.
After home costs, it is equally important to calculate your other monthly expenses. I suggest pulling up bank and credit card statements to see how much you’re spending. Look at your fixed expenses such as car payments, car and life insurance etc., as well as variable ones such as phone and internet bills, groceries, entertainment, gas, car repairs, child expenses and activities, entertainment, membership fees, subscriptions, medications – the list, goes on and on.
Another thing to consider is how long you plan to stay in your home. There are costs associated with buying and selling real estate. If you think you might need more (or less) space in a years time, you may want to consider that now. Also, how much work you are able to do on your own? Can you purchase a home that needs some work? How many of your daily comforts you can go without if the budget gets tight?
If you are thorough with your numbers, you will have an accurate assessment of how much you can afford to spend on a house.
The most important piece of advice is to be realistic; buy with your brain (as well as your heart) and try to avoid becoming ‘house poor’. If being able to afford your dream home means that you can’t pay for necessities or the things you enjoy, you can’t really afford it. So remember, just because the bank offers you a certain amount of mortgage financing doesn’t mean that you can, or should, take it all.