Stretching your budget too much could have severe consequences.
- A recent survey reveals a quarter of home buyers would go way over budget to purchase a home.
- It’s a good idea to keep your housing expenses to 30% of your income or less, and that means not overspending on a home in the first place.
Finding the perfect home is a tough thing to do in a normal housing market. But in today’s market, it’s even more difficult.
Housing inventory has been extremely limited for well over a year. Home buyers are increasingly having to compromise on what they want, whether it’s settling for a smaller home or one that’s out of date. But some buyers may be looking to compromise in a different way — by spending more than what they initially planned on.
In a recent HomeAdvisor survey, 63% of respondents said they’d be willing to go over budget for the perfect home. But 25% say they’d go $100,000 over budget for the perfect home. That’s a mistake that could have really bad repercussions.
How much should you spend on a home?
As a general rule, it’s a good idea to keep your monthly housing costs to 30% of your take-home pay or less. And by “monthly housing costs,” we’re talking about all predictable costs, like your mortgage payment, property taxes, homeowners insurance, and HOA fees, if applicable.
If your housing costs exceed that threshold, you could end up struggling to keep up with not just home-related expenses, but your expenses across the board. If you go anywhere in the ballpark of $100,000 over budget when buying a home, you could really put yourself in a precarious financial situation.
Imagine you have $50,000 available as a down payment on a home. Using a mortgage calculator, you might set a home-buying budget of $250,000. If you’re able to get a 30-year mortgage at 3.5%, you’ll be looking at a monthly payment of $899 for principal and interest on your home loan.
Now, let’s say you decide to stretch your budget and buy a $350,000 home instead. All other things being equal, you’ll be looking at a monthly payment of $1,348 for principal and interest. That’s an extra $5,388 a year — for principal and interest alone. And that extra sum could be enough to drive you into unhealthy debt, even if you manage to keep up with your mortgage payments themselves.
That’s why it’s …….