If you’re like most Americans, buying a home is by far the biggest purchase of your life. And, if you’re like most Americans you have a question about how much should you spend on a new home.
So a little background on this week’s question, I routinely watch shows on HGTV like House Hunters, Property Brothers, and Love it or list it. While watching couples with a combined income of fewer than six figures set their mortgage budget for homes north of a $1 million dollars, I started thinking, how much home can I afford, and how much should I spend on said home now that I’m officially planning to buy my first home?
Now the issue with planning for a future on Pinterest and Zillow, though, is deciding if it’s reasonable. I mean, do I really need a fixer-upper historic home and to have a backyard she-shed? Before I start spending all our moo-la on this “Pinterest dream home” I figure it’s time to ask Wela COO, Eddie Goepp:
HOW DO I KNOW HOW MUCH HOUSE I CAN AFFORD WHEN I’M LOOKING TO BUY ONE? IS THERE A GENERAL RULE OF THUMB? SHOULD I LISTEN TO HOW MUCH THE BANK SAYS I CAN AFFORD?
Related: When You Should Rent Instead of Buy
Eddie Goepp, COO of Wela
“Figuring out how much house you can afford can be very confusing. There are conflicting pressures from all different angles…you want to live near your friends; you want to live near good schools, restaurants, parks, etc. The bank says they’ll lend you “X”, your advisor says you should spend no more than “Y”, and all the while, your real estate agent (the expert you’re leaning on in this arena) is compensated based on the purchase price of the home!
At the end of the day, try to stick to two numbers, 20 & 28. The first one, 20, is the percentage that you should aim to use as a down payment. If you buy a $250,000 home, you should put down $50,000. Save until you hit that number. The second, 28, is the maximum percentage of your gross income you should spend on PITI. That’s Principal, Interest, Taxes, and Insurance. So if your household income is $100,000, then your total monthly payment should be no more than $2,333.
And remember, just because they’ll lend it, doesn’t mean you should borrow it!”
It’s time to go and crunch some numbers to figure out how Pinterest-y my next home can be without breaking the bank.
If you have a financial question that you want to ask our financial advisors here.