Congratulations! You’re in the hunt for a home – which for most people is one of the first, and often the largest, long-term investments they will make in their financial future. When the market is heating up, the pressure to make your decision and act quickly can get ahead of the prudent budgeting and planning necessary to make a rewarding decision. We’d like to take you through the process you ought to be following before you decide to put pen to paper on your Purchase Agreement and eventually your first mortgage.
Traditionally, a home that is kept up and improved with some constant sweat equity, will increase in value over time, which can turn out to be a great vehicle for building your net worth. One could argue that building equity, combined with mortgage interest tax deductions makes home ownership a necessary milestone in sound personal finance.
It’s important to purchase the right home for you and/or your family, and that takes some planning. Building on another one of our blog posts where we introduced a new way to look at savings a developing a budget, creating a budget for your home is a bit more involved. The average person lives in their home for 13 years before they move. A person in their 20’s can have quite a few different life events happen that would affect their future budget; marriage, children, student loan payments, job transitions or planning for retirement savings. So, you MUST budget room for life to happen when you consider buying a home. It may not even be life events to budget for, it may be savings goals (automobile purchases, vacations, etc.), or making improvements throughout your home (home ownership requires continual maintenance to preserve home value). The Consumer Financial Protection Bureau (CFPB) has a useful worksheet to help budget for those future expenses and goals.
Without factoring in those future goals, you may find yourself making an offer on the top end of what you’re preapproved for, often set at what you can presently afford, and find yourself “house poor” in the not-to-distant future. What that means is that you can afford the home you’re in, but being inflexible with funds for life events will more than likely have a negative impact on your monthly cash flow. Most conventional mortgage products have a requirement to not exceed 43% of your gross income with debt obligations. Putting yourself at that maximum without including future savings may prevent your ability to cover unexpected events. See the example below differences you’ll see one what you could buy versus what you should buy.
In this example, you’ll see that the home that they should to shop for is quite a bit different than what they could be shopping for. The income and current expenses are the exact same for both examples, but folks going down the could route and maximize the amount of mortgage they can withstand for their income may have difficulty putting money away for retirement or vacation. The folks following the should route still become homeowners and gain the benefit of building equity, but they also have room to put away $850 per month into savings!
Buying into what you could buy into may hinder your opportunity to grow your financial wellbeing down the road. This graphic illustrates the importance of building a long-term budget to match up with your long-term investment. In doing so, you’ll have a better grasp on deciding on a good home price that will compliment both your own and your family’s current lifestyle, while leaving room for growth in the years to come.
All that said, if you are beginning your search for a new home, make your first stop here, at the First National Bank of Osakis. We have numerous products, and will take the time to understand your goals combined with your budget to help you make the best decision possible.