In 2019, over 2 million people bought their very first home. If you want to join their ranks, you’re probably already intimidated by the process.
Can you even afford it? How much do you need for a down payment? How do you budget for house expenses? Is it worth it?
Don’t worry. Read on to find the answers and decide whether or not buying a home right now is right for you.
Should I Buy or Rent?
This is the big question. As housing costs eat up most of your budget, is it better to start building equity in a home or keep enjoying the perks of living in an apartment?
And considering the looming eviction crisis, is it even worth living at the whims of a tyrannical landlord? Or is it time to settle down and start building some security, even at the cost of a terrifying mortgage?
Can I Even Afford It?
These are all questions you need to answer, and that answer is going to be a personal one.
But we can help you decide if paying a mortgage is better than paying rent as far as budgeting is concerned. It’s called the 5% rule. It factors in the cost of your mortgage, property taxes, home repairs, and investment cost of buying a home.
The rule is easy. Take the home price, multiply it by 5%, and divide it by 12. If rent is higher than that number, it’s cheaper to buy a home.
So if you’re going to buy a $150,000 starter home, here’s how that math looks:
So if rent in your area is higher than $625 a month, you should consider buying a house. It’ll be cheaper on your budget.
How Much House Can I Afford?
Once you know you want to buy a house, you need to figure out how much house you can safely afford.
If you can “barely” afford it, you can’t afford it. Most likely your mortgage lender will offer you a mortgage that’s much bigger than you need because they make money off interest. The higher the mortgage, the more interest every month.
So just because your mortgage lender says they can give you $350,000 for your new house, doesn’t mean you should take all $350,000. You may not be able to afford it.
A good rule to follow when you’re trying to figure out your house budget is the 28%/36% rule. This rule says your housing expenses shouldn’t account for more than 28% of your budget. Your total debt payments, including your mortgage, shouldn’t account for more than 36% of your budget.
So if you’re bringing home $6,700 a month, your mortgage is at 2.8% and you’re debt-free, you could afford a house that’s about $456,000.
But what if you have some debt? Let’s say you budget $1,800 towards debt payments from student loans, credit cards, and car payments. In that case, you can only afford a mortgage of about $148,000.
There’s a lot that goes into figuring out how much house you can afford. You can learn more here.
What About Taxes, Repairs, and Furnishing?
Look at you thinking of all the important things! When most people are putting together a budget for buying a house, they don’t factor in these vital and very real expenses.
First, let’s talk about taxes. The national average for property taxes is 1.08% of your home’s value, but this varies from state to state. So if you have a $200,000 home, your annual property taxes will be about $2,160.
These numbers fluctuate as the tax rate for your state changes. Typically you pay your property taxes in two yearly payments each year, for always and eternity. To make it easier on your budget, figure out an estimated annual tax payment and set aside a little bit every month so you have the money when you need it.
Home repairs are a different story because you can’t guarantee exactly when something in your home breaks. If you could, you’d probably guarantee nothing ever broke.
And some years you might have an easy fix like a broken window, whereas other years you might have to replace the roof or your water heater.
It’s also a good rule of thumb that home repairs will cost about 1% of your home’s value every year. And just like with property taxes, it makes sense to break this up into a monthly savings goal. That way, when something does go wrong, (hopefully) you’ll have the money already saved up.
And finally, you have to furnish your house. However, furnishing your home can be alarmingly expensive. Some estimates say you should expect to spend 10% to 50% of your home’s value in furnishing!
But this is an area where you have a lot of wiggle room. You can be smart and dumpster dive in ritzy apartment neighborhoods for your furniture to save money. Even still, you should get a general idea of the furniture you want in your home and start saving for that too.
I Can Never Get a Home Because I Don’t Have 20% Saved for a Down Payment
Not true! Financial gurus recommend you save 20% for a down payment because that way you won’t have to pay for private mortgage insurance. After all, PMI protects your lender, not you, and it typically costs 0.5% to 1% of your loan every year.
But it’s an unnecessary guideline that stands between you and homeownership. In many cases, renting an apartment can be more expensive than buying a home, even when you factor in mortgage insurance.
Instead, consider an FHA loan. These are designed to help first-time homeowners afford a home, and you only need 3.5% down. Thinking of living somewhere rural? Look into USDA loans. These loans need no down payment.
These Tips Will Help You Budget for House Expenses
Putting together a budget for house expenses can feel like an intimidating process, but it doesn’t have to be. These rules will help you know for sure whether or not you can afford a house, and whether it’s even a smart idea for your current life plans.
Now that you’re a potential homeowner, you have lots of questions about caring for your new home. Keep exploring our blog to find all the answers.