Springtime can bring opportunities for change and perhaps buying a new house. If you are relocating, downsizing, upsizing, first-time buying, or just refinancing, there are a few general rules of thumb to remember when you contemplate how much mortgage you can afford. Remember that mortgage lenders and realtors will often tell you what you can borrow but not necessarily what you can realistically afford without consequence.
(1) House Price < 2½ times your income.
(2) Mortgage < 2 times your income.
(3) Monthly Mortgage payment < 1 week paycheck.
(4) Total Debt < 40% your income.
For example, if your joint income is $100,000 then look for house prices at $250,000 or less and take on a mortgage of $200,000 or less. You may be giving up going out for pizza on Friday night or spring break vacations to Mexico in order to afford your new house. You may end up bickering with your spouse when they buy new shoes or new golf clubs because you cannot afford those extra costs. Think hard about what you really want and what you are willing to give up for it. Some people are homebodies and some are always gone on an adventure, perhaps requiring more or less of their house.
Try to put down 20%. Having equity in the house gives you choice to move even if the market value of your house drops. Being stuck, unable to re-write your life course, generally sucks.
Watch overall debt. Debt straps you down in life and keeps you its prisoner. If your income decreases or your other expenses increase, you still need to be able to make all of those debt payments or they start building like a snowball that gathers speed quickly and knocks you over. Consider college-debt, car-debt, and credit card-debit when you consider your mortgage-debt.
By Cammie Humke, Investment Adviser at The Humke Group, Inc
Located at 555 S. Randall Rd in St. Charles, IL, phone 630-584-7343
The Humke Group, Inc is an independent firm offering securities through Summit Brokerage Services, Inc., Member FINRA/SIPC. Advisory Services offered through Summit Financial Group Inc., a Registered Investment Adviser. Opinions expressed are that of the author and are not endorsed by the named broker/dealer. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.