If you place a bid on a home, 10 or more others may also do the same, often leading to fierce bidding wars. Emotions can get the better of anyone when on the verge of losing the bidding battle. Avoid putting yourself in a situation where placing the winning bid undermines your long-term financial plan. A much better way to approach home buying today is to be better informed and fully prepared.
Don’t repeat the mistake so many people make when thinking about purchasing a new home. Most often, they will go to a home mortgage calculator and enter their annual income. The number that pops out on the screen is the maximum loan amount or home purchase price (at prevailing interest rates).
That number really tells you the amount the bank will approve. It is not necessarily the amount you should spend!
For most people, their home is their most valuable asset, and usually the source of their greatest debt. The mortgage principal and interest is a large part of this monthly expense, but also associated with the home purchase is the cost of homeowner’s insurance, property taxes, home maintenance, and mortgage insurance (when the down payment is below a certain threshold).
This points to the importance of understanding—really understanding—how these monthly payments will affect your financial planning. And that brings us to the main point of this post.
The main consideration is not “how much home can I afford on my income?” Instead, think of it this way: “After accounting for your planned savings, typical and planned expenses, and lifestyle, how much money is then left to comfortably pay the expected costs of home ownership?”
This turns much of the conventional wisdom on its head. Don’t allow a home purchase to alter your plans when it comes to your financial future and life goals. Your home will certainly be part of that future, but make the home purchase fit into the savings and investment plan, not disrupt it.
Lenders may try to convince you to maximize your purchasing power, based on your income. We advise our clients to maximize or maintain their planned savings, and base their home purchase on that amount.
You will almost certainly encounter many factors along the way that could change or alter plans, such as sickness, a job relocation, change in marital status or family size, or the need to move an older parent into your home. A term we use often these days is “financial peace”—we help our customers seek and maintain financial peace. By looking at the big picture, long term, home ownership becomes part of this vision.
Call Isakov Planning Group today if you are unsure how much to budget for a new home purchase while maintaining your current lifestyle.