How Much Can I Afford to Spend on My First House?
So you have decided to buy your first house. Congratulations! This is a huge decision and a milestone in your life that you should be very proud of. Buying a home is a dream for many, and many people are never able to take the step of signing off on a mortgage and moving into their own home. You have worked hard and saved up enough money to start scanning the housing market, and you are ready to embark on the adventures of homeownership.
One question that might hit you fairly quickly is “just how much money can I afford to spend on a house?” Between down payments, mortgage payments, closing costs, and other unforeseen monthly expenses, the costs of buying and owning a house can be hard to anticipate – especially if you have never done it before. We wrote an entire post a while back about how to build a budget to save for a house, but we never described how to figure out how much you can actually afford to spend on a house! This post is going to help you determine just how much money you can afford to spend on your first house while avoiding the mistakes of many first-time homebuyers.
Your Monthly Payment Compared to Your Monthly Gross Income
The amount that you can afford to spend on your home is relatively easy to determine mathematically. Generally, you should spend less than 28% of your gross monthly income on your mortgage payment. Your gross income is what you make before taxes and benefits contributions are taken out of your paycheck. So, if you make $6,000 per month, you should not be paying more than $1,680 to your mortgage. This may seem like a low amount, and it may instantly put many of your dream houses out of reach. They should be though! If you are buying your first house, odds are you are not yet at a point in life where buying your dream home is a reality, anyway. Buy a house that you can afford for now, and in the future when your situation looks differently, you can potentially upgrade.
This 28% number is somewhat fluid, too, and the true situation can differ per person. However, the general idea is the same: you do not want to overcommit to making payments that you cannot afford to make. Sticking to the 28% rule (which you could stretch to 30%, but try not to do that for your own good) is a great baseline when thinking about how much you can afford to pay each month. That’s all it really is though – a baseline – and you should be sure to consider the other points in this post, too.
The Mortgage Payment Isn’t Everything
First things first, you want to make sure you are not overcommitting on a mortgage payment that you cannot afford. However, it is crucial to realize that there are many more monthly payments you will need to make on top of just your mortgage payment. Utility bills, homeowners’ insurance, maintenance and upkeep costs, and private loan interest are a few examples of payments you may need to make in addition to your mortgage payment. Committing to a $2,000 monthly mortgage payment may seem affordable at first, but when you factor in another $500 of monthly financial obligations related to owning the house, you might be a bit more strapped for cash than you expected.
Houses tend to be bigger than apartments, meaning you will naturally use more energy to power them, cool them, and heat them. Becoming responsible for the upkeep of the house can really begin to cost a lot, too. Rooves are not cheap to replace! Many costs that are taken care of by a landlord in an apartment tend to be taken for granted, and living in a house of your own makes facing them an unavoidable reality. Homeowners insurance is a lot more than renters insurance, too.
Use Your Down Payment as a Litmus Test
The down payment that you make on your house is one of the biggest determinants of just how much you can afford to spend on the house overall. First things first, the more of the house you can pay off at once, the better. This is because whatever portion of the house you pay off with the down payment will not be charged interest. This difference can be thousands of dollars! If you can afford a 20% down payment, great. This is standard. However, if you can afford a 25% down payment, by all means, do it! This means 5% less of the house will be included in the mortgage, and you will pay that much less in interest.
Additionally, the amount that you can afford to pay in the down payment is usually a good litmus test regarding your ability to afford the house in its totality. If you can hardly put together the means to make a sufficient down payment, odds are you may struggle to make the monthly mortgage payment. If you can make a $20,000 down payment with ease, you probably will not have too much of an issue making your monthly mortgage payments. It is important to mention that this is nothing more than a litmus test, as everyone’s financial situation is different. Someone with no savings that just started a very high paying job may not be able to make a down payment but could still afford high monthly mortgage payments, whereas someone who has been saving for decades may be able to afford a huge down payment but not have the monthly income to make the mortgage payments.
Consider Your Lifestyle and Other Wants and Needs
The points above demonstrate the maximum amount you can afford to spend on a house, but that is not necessarily the end of the conversation. Just because you can afford to spend a certain amount does not mean that you should! You should buy a house within your budget that you like, at a price point that does not distort the rest of your life’s expenditures. Much of this falls into having a strong monthly budget already built out. If you have hobbies or interests that cost money, be sure you are ready to give them up or trim them down before committing that money to your mortgage payment. Homeownership is amazing and is a huge milestone, and you do not want to feel salty later about how your mortgage payment replaced your golfing hobby – if it didn’t have to, that is.
Thanks for reading our post about determining how much you can afford to spend on your first home. This is a really exciting time, and doing your due diligence now can keep the situation from turning stressful down the line. There will be many hoops to jump through as you navigate the homebuying process, but it will all work out just fine (especially if you have a good realtor!)
If you visit Myrtle Beach or any other place in South Carolina and fall in love, reach out to us for help. We at The Boyd Team are always here to help you figure out whether Myrtle Beach is your next home or not, and we are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at eddie@boydteam.com or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.
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