Just when you think housing can’t get more expensive buying a home literally goes parabolic. In Denver, 65% of homes are selling for over asking price at an average of over $30,000 but many are going for even more. There are countless stories of people bidding over asking and still not coming in the highest. It’s gotten so crazy recently you may wonder how do people afford houses. You want to own a home but now you don’t know if you can afford to buy a home. How do you know if you can afford that house or not? Is renting now cheaper than buying a house? Here are a few things to consider when figuring out how much house can you afford. Know the rule of thumb for home spending but also how much should you expect to pay to maintain that home every year? How much does it cost to furnish a house? How will this home impact your other spending?
Rule of Thumb for How Much To Spend on A Home
A rule of thumb is that housing costs should be no more than 30% of your gross income (pre-tax income). What does housing costs actually encompass though? It includes your mortgage, taxes, bills like electricity, water and wifi and any repairs you may have to make. Make sure you factor in these other expenses when looking at properties. It’s easy to look at just the mortgage and tax payment and forget about the monthly and ongoing expenses.
Understand The True Cost of Home Ownership Per Year
How much does it really cost to maintain a house every year? Million Acres suggests a few different ways to estimate this. One rule of thumb is to estimate between 1% and 4% per year of the original purchase price. Another rule of thumb is to estimate $1 per square foot per year for general wear and tear and upkeep.
On top of this, you’ll encounter major repairs at some point during home ownership. This can include replacing major appliances like water heaters, renovations, adding onto the house such as a patio, deck or addition. When buying a home know how many major repairs are likely in the next 3-5 years. Ask how old the appliances are and know the average lifetime of those appliances. Don’t waive the home inspection so that you know if there are major home repairs required. If you’ll want to renovate all or part of the house factor that into your budget.
Understand What Else You Need to Buy For Your New House
You’ve bought the house, now you need to furnish it. If you’re moving from another house, the initial set up fees will be way less. When I first moved into my condo it was my first time living by myself. I had all these ideas on small improvements like painting, curtains and decoration ideas. When I went to Home Depot I was shocked that it would cost over $1,000 just for basic blinds for windows for just one room. I couldn’t believe it, I thought these costs were only to be seen for high end custom work! The bigger the house, the larger this bill will be even for the basics.
Luckily, there are a lot of financial tips to save money on furniture, decorations and other household items.
How Your New Home Will Impact Your Other Spending
When buying a house, it’s easy to only look at how much you were approved for your mortgage and the amount you’ll be paying for your mortgage and taxes every month. But, it’s not good to look at housing costs in a silo.
Where your home is located impacts your other spending. Say you’re moving from the city to the suburbs. In addition to the house you may now need to buy one, or two cars. With the cars comes insurance, gas, car maintenance, car taxes and other various fees. Do you have kids? What school district is the house located in? Will your kids go to public school or will you need to send them to private school? How much is childcare?
Of course, where you buy can impact smaller expenses like how much it costs to eat out and groceries. But, the big expenses like another car and childcare / school can make a huge difference in your financial situation. The difference between children attending public school and needing to pay for private school can run you tens of thousands of dollars a year. And, sometimes real estate taxes can vary wildly town to town, even for towns next to each other. It’s important to know what these expenses will be before you buy the house. It may result in a smaller budget for the house or even finding a different area to buy in.
Renting vs Buying a Home – Which is Better?
Ok, the above is costly but isn’t it cheaper than renting? It’s hard to put a blanket statement on which is better renting vs buying because so many factors can ultimately change that answer for individuals. It depends on where you buy, what the market is like in that location, housing appreciation / depreciation, how long you’ll stay, how much money you need to put into the house and more. Instead of guessing or making an assumption based on what you hear from someone use this data. Nerdwallet has a good renting vs buying calculator that enables you to enter in a few data points and it’ll spit out the answer whether renting or buying will be better for you.
Can I Afford A Home Calculator
Once you know if it’s cheaper to rent or buy, determine how much house can you afford. Nerdwallet has a good how much house can I afford calculator. Remember these calculators are based on the rule of thumb for how much to spend on housing. The calculator includes the mortgage, taxes, HOA and insurance. You personally need to figure out how much you’ll spend per year on home maintenance, renovations, furnishing the house and how it increases (or decreases) any other expenses. Those expenses are usually not included in these online calculators but are very important expenses to take into consideration.
Know Your Financial Goals And How A House Impacts Them
Yes, the rule of thumb for housing costs is that you should spend no more than 30% of your gross income. But, what if you only spend 20% of your gross income? How does that change what you can afford to save or what other things you can buy? Because housing is such a big expense, spending less than you can afford here can make a huge impact to how much you can save, the vacations you can afford and more. It will go much farther than skipping a $5 latte or clipping coupons for groceries. This difference can easily add up to thousands of dollars more a month in your pocket.
Additionally, spending less on housing enables you to be more flexible with major income changes. When income changes unexpectedly, or when you’re considering a career shift / retirement it’s very easy to cut back on discretionary expenses if needed. It is much harder to cut back on housing expenses. You’re pretty much limited to looking at holding off housing projects, trying to cut utility costs, and refinance if interest rates are better.
On the other hand, if you don’t travel, don’t spend much on hobbies a nicer house may align exactly to your goals. You’re going to spend most of your time at your house and want to enjoy that time.
What factors did you consider for whether or not you could afford your house when house shopping?
This is a well explained article. Nice job!
Thank you!
30% of gross income for housing plus 15% for retirement plus 25% for income taxes plus 10% for giving doesn’t leave much to live on. We never paid more than 10% of our gross income on housing so we were able to fund the other categories and still have money left over. That’s got to be difficult to pull off now. If it wasn’t for crazy low mortgage rates I’m not sure a middle income family could even do it.
I agree, especially if you don’t assume spending a certain amount on maintenance every year and all of the other costs that come with homeownership. I too spend less than the 30% rule of thumb on housing which has allowed me to save a higher percentage of my income as well as spend more on discretionary purchases I enjoy like travel. Spending that much (or more!) on housing really impacts the rest of your spending and saving goals.