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Homebuyers Should Do Their Own Math

Thursday, October 20, 2005 posted by Tommi Crow

Let’s Get Real

A too-big house payment can, at the very least, leave your family strapped for cash. At the worst, it can leave you open to foreclosure, bankruptcy, and don’t forget, divorce. Avoid future disaster and get a handle on what you can really afford.

Helpful Advise?

Never count on a mortgage company, real estate agent, friends, neighbors or an internet calculator to tell you what you can afford for a house payment. Only you know what your expenses are and what your future holds. None of the people pushing you into that big mortgage payment will fund your Retirement, Vacations, Hobbies, College Tuition, Braces for your Kids, or utility bills and upkeep on that big house.

How Much Should You Spend on a House Payment?

Roughly, no more than 25% of your monthly income. But, don’t take my advise. Even though math makes your head hurt, please, for your sake, start doing your own.

How much money will you need to save each month to reach your goals?
What are the hidden costs of owning this home? Count on spending about 2% of your home’s total value for basic maintenance.
Do you have an expensive hobby? Budget for travel, golf, or that antique you love to find.
To you have kids or do you plan too? Kids change your life and finances forever. Maybe, you want to have the option to have one parent stay home or work only part-time. If not, you will need to pay for childcare. Perhaps, you want to travel with your children or pay for their college education. Your future goals may only be a dream, if you need 2 incomes or every extra penny to make ends meet.
Does Your Income Vary? Most of us have variable incomes to some degree. Consider basing your house payment calculations on your average over the last several years.
What about Your Retirement? 30 years ago most workers benefited from retirement pensions. Today, we have to carve enough out of our budgets to fund 401K’s and IRA’s.
What are your other monthly debts and obligations? Remember that your credit card obligations, student loan, car payments and utilities will still be due each month, along with that big mortgage payment.
Is your Income Really Likely to Rise? If you just graduated from law school, maybe. But, none of us should count on the double-digit raises some people saw in the 70’s and 80’s.
When considering how much house payment to bite off, know what you can chew. Money woes are unpleasant to say the least. At the end of day, use your own gut and only stretch because you feel comfortable doing so.