Before you set out to buy a home, the first thing you need to do is set a budget for yourself and understand how much you can afford. There is no single guideline when it comes to home buying budgets, but there are many rules you can consider. From there, you can choose the one that suits you best.
Ways to Judge How Much Home You Can Buy
Some methods of homebuying emphasize what you can buy, and how much home you can realistically afford. On the other hand, alternative methods emphasize the amount of home that you should buy. If you’re thinking of how much home you can buy right now, you should look at the 28%/36% rule. On the other hand, the Dave Ramsey method approaches homebuying from the opposite direction and proposes goals you should reach before homebuying.
The 28% and 36% Rules
The 28% and 36% rules function on a similar basis. Neither necessarily places much importance on the size of the down payment or restricts you to a certain payment schedule. Rather, these rules focus on your ability to make a home purchase by meeting the monthly payments. First, the 28% figure refers to the total cost of monthly payments related to the home, such as mortgage insurance, interest, taxes, and the principal. If these costs combined don’t exceed 28%, then you can feel reasonably safe making the monthly payments.
That is unless you violate the 36% rule. This is the calculation of your monthly home expenses plus bills, payments on non-home debts, etc. If you’ll find yourself spending over 36% on monthly expenses after purchasing your home, then you should fix that first before moving forward with the home purchase. Pay down your debts, look into reducing bills and other expenses, and then proceed with the mortgage.
Conservative Homebuying With the 20%/25%/15-Year Approach
Famous financial advisor Dave Ramsey proposes three guidelines for a prospective homebuyer. While many people take on 30-year mortgages and use low down payments, these are risky prospects that cost you a great deal of money in additional interest over the long term. He proposes that you always save up a 20% downpayment, take out a 15-year mortgage, and do not allow home-related expenses to exceed 25% of your gross income. For instance, saving $50,000 and making a household income of $6,000 per month would allow you to buy a $250,000 home.
While these goals are tall orders for most people, there are great benefits to this approach. You’ll enter homeownership with 20% equity, you’ll avoid expenses like private mortgage insurance and your lifetime interest payments will be minimal. However, paying rent for years while saving up a 20% down payment may end up being more expensive than interest and mortgage insurance.
How Much House Can I Buy?
If neither of these methods suits you or you’re not sure which one you prefer, there are many more to consider. Either way, you can gain the insight you need by reaching out to the experts at Potempa Team. We’ve helped countless people buy homes in Arizona, and we’ll be able to quickly provide a reliable estimate on how much mortgage you can afford.