Today’s post is dedicated to a few tips that should go into the process of making sure that an upgrade in housing is still within your budget. We all know that it feels good to think about getting a bigger and better place, but the more important question, is can you really afford it?
If you are renting, a couple of these issues don’t apply, but the process in general is still applicable.
When you are considering moving, here are a few things to keep in mind to make sure that you don’t bite off more than you can chew.
1. Before you decide to move. Keep in mind that it is good to have this process take place early on. Otherwise from our experience and observations, there is a certain point when you’ve convinced yourself of a move and won’t be as open looking at the numbers objectively.
2. One-third Rule. In general, the guidance is that you should spend no more than one-third on combined housing costs. Keep in mind that this is the upper limit. The more you spend on your housing costs, the less you have for other of life’s obligations and pleasures. This will also vary somewhat on how much extra room you have in your budget. If you are on a more limited income, maxing out your housing expenses will be more of a pinch in hard times than if you have more wiggle room.
3. Calculate your Down Payment. Make sure you’ve done all of the math to determine how much you’ve got for your down payment. Make sure to deduct agent fees, taxes, add-ons, etc.
4. Private Mortgage Insurance (PMI). Also make sure that you avoid PMI at all costs. PMI is basically the penalty that is placed against you if you don’t have a certain percentage down, generally this is 20% down. If you don’t have a large enough down payment it will mean that you will have to pay for insurance to make you less of a liability to your lender. One way to avoid PMI is to get a second mortgage, but given the current housing market you are better off just making sure you’ve got a solid down payment.
5. Account for all expenses. It is very easy to budget things out without keeping everything in mind. Make sure you’ve included your initial mortgage, possibly a second mortgage, PMI, taxes, water/sewage, electric/heating, etc.
6. Make up a mock budget. Make up at least three different scenarios from your current budget. This way you can easily see what sacrifices you would have to make to get what level of house.
Taking the time to do these simple steps will help to ensure that you can afford the move. Also keep in mind that if you are a first time home buyer, or haven’t gone through the process in awhile, it’s okay to ask questions. Talk with your real estate agent, banker, accountant, etc., to make sure you’ve done your homework.
Good luck,
Miel
