Buying a home is a big decision that’ll affect you in countless ways, including your budget. If you overspend, you may soon realize that you’ve made a mistake. And if that happens, it could force you to make adjustments in other areas of your life.
On the plus side, there are some basic steps you can take to determine your home buying budget. Here are four things you should do:
1. Assess your current housing budget
Before you make a decision on what comes next, take a look at your current housing budget. How much are you spending on your mortgage or rent? Does it fit nicely into your budget? Would a change do you some good?
Your current budget is the foundation for everything you do moving forward. Don’t forget to take this important step. Doing so could cause you headaches that you don’t need.
2. Seek a mortgage pre-approval
If you don’t know how much you can afford to borrow, this is a good place to start. A pre-approval letter will give you an idea of how much home you can buy. Not only does this keep your budget in order, but it also provides guidance when adding homes to your “visit list.”
Note: a pre-approval letter is also attractive to sellers. This shows them that you have access to the money needed to close.
3. Consider your down payment
Your down payment will impact your monthly payment, as well as the total amount of money that you borrow. Shoot for a minimum of 20 percent down, but don’t be shy about a larger amount if it’s available to you.
The more you put down, the lower your monthly payment. This frees up money in your budget for other expenses.
4. Make a list of related expenses
Don’t get so hung up on the cost of the home that you overlook related expenses. These include but are not limited to taxes, insurance, HOA fee, upgrades, and maintenance.
Knowing all your expenses upfront allows you to plan accordingly for the future.
When you follow these steps, you’ll find yourself better positioned to pin down a home buying budget that works in your favor for many years to come. This allows you to comfortably afford your mortgage payment, while maintaining other areas of your finances.
Are you a homeowner? How did you calculate your home buying budget? Would you add any other steps to the four above?