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How Much Should I Spend on a House?

Updated on March 19, 2016

Buying a Home

In times past, the American dream was to buy a home. However, with record levels of student loan debt and a weak job market, many young buyers are delaying the purchase. There are a lot of areas of the country seeing price appreciation. For many people, they believe that now is the time to jump in the market to make a purchase.

Am I Ready?

Before buying a home, there are a lot of things to consider. Buying a home reduces the amount of flexibility you have in life. Not only does this decision saddle you with a mortgage payment, but it also reduces your ability to move to other areas without selling or renting the home. As the economy continues to improve, there are a lot of banks looking to lend money. Student loan debt is not helping the equation either. Here are a couple of things to consider before buying a home.

  • Do I Have the Money?
  • Do I Want to Live Here?
  • Is There Future Appreciation in this Area?
  • What Percentage of My Income is the Mortgage?

Answering these basic questions will give you a good idea of where you stand on buying a home. This is one of the biggest financial decisions that anyone makes, so making a good decision here is essential.

Mortgage Options

There are many mortgage options on the market today. It is vital to keep the long term in mind when making any financial decision. This is especially true for financial decisions as large as buying a home. Over time, many people come to regret their decision to purchase a home. Buying as much home as you can possibly afford is never a good idea. Instead, try to find the right balance between your finances and the home you want. Always treat a purchase like an investment, even if it is not in the stock market.

Qualifying For a Mortgage

Banks are more willing to lend to home buyers than at any point since the Great Recession. Buying a home is a big financial decision, and qualifying for the mortgage is a huge part. The credit score is one of the biggest factors in this decision. In addition, banks will look at your debt to income ratio. If you have high levels of debt and a low income, it may be difficult for you to qualify. There are several steps you can take today to increase your chances of qualifying.

  • Increase Income
  • Pay Off Debt
  • Build a Large Downpayment (10 - 20%)
  • Build Credit


Interest Rates

Interest rates are one of those things that affect your life that few people understand. If you are buying a home, understanding interest rates is essential. This is essentially the annual rate you pay for the ability to borrow money from a bank. The better your credit score, the lower your interest rate. Right now is a great time to buy a home because interest rates are historically very low. Over time, this will save you a lot of money as a home buyer.

Fixed or Variable

A fixed interest rate means that the borrower pays the same rate throughout the life of the mortgage. A variable interest rate means that the rate can fluctuate throughout time. With the low interest rates on the market today, it is a good idea to go with a fixed rate mortgage. Rates have only one place to go from here and it is not down.

Poll

Do You Own a Home?

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How Much Should I Spend?

When looking for a home, it is tempting to buy as much as you can afford. However, there are a lot of financial repercussions with this decision. Does everyone remember the last financial crisis? Millions of borrowers were mortgaged to the gills. Everyone was going great until the market crashed. Instead of trying to impress friends on social media, think about the purchase of your home as an investment.

Income to Payment Ratio

A good rule of thumb is to make the payment on your mortgage, taxes, and insurance no more than 25% of your net income every month. In some cost of living areas, this is going to be difficult. Buying a home in Wyoming is much different than buying a home in California. However, the less you have to pay each month in payments, the more you can build wealth in other areas. It is true that real estate appreciates over time and that a home can be a good investment. However, taking on mountains of debt to buy a home in the hopes it appreciates is not a good idea.

Next Steps

If you are set on purchasing a home, there are several steps to take in order to make a good decision in this area. Buying a home for under market value is always a good thing. This may require more work and time on your end, but over time it will pay off. Here are some things to keep in mind when looking for a home.

  • Age of Roof and HVAC
  • Location
  • Growth of Area
  • Price

Buying a Home

When you have found a home that fits your dream and budget, don't feel bad about pulling the trigger. Just remember that there are a lot of people who have lost money on the purchase of a home as well. Over time, this is one of the biggest financial decisions you will ever make.

Rent or Buy?

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