Can you afford to buy this home in this crazy real estate market?

0
35

[ad_1]

The housing market caught fire during the Covid pandemic. People want to relocate, get more space, or just make money on real estate. Don’t forget that less than ten years ago; we were just emerging from a big recession and a big housing crisis. It is imperative that you think about where you want to live and how much home you can actually afford. In this crazy real estate market, it might be tempting to hurry up and go to war on bidding, but is that the best for your financial future? Or huge mistake in real estate?

Read the seven questions you need to answer before buying a home today. I will leave the conversation about changing the location or even the surroundings for another time. Basically, this conversation about buying a home boils down to how much house can you afford and whether it really makes sense to spend money.

1. What is the total cost of living in this house?

The cost of ownership isn’t just about paying the mortgage. There is homeowners insurance (I was just notified that my next year will grow by 25%), property taxes and maintenance. Don’t forget about utilities. You may also have to pay a gardener, pool worker, HOA, private mortgage insurance (PMI), etc. furniture or decor for their new home.

These can all add up, so make sure they stay within your budget. Try to estimate the total cost of living in the house.

MORE FROM FORBESWhen will the Los Angeles housing market crash?

2. Will you still have an emergency fund after the down payment?

First, having a good down payment as well as a contingency fund indicates that you are already making smart financial choices. Moving to a new home costs a lot of money, in addition to the costs associated with buying that new home. Many home buyers face budget constraints due to overlapping rents and mortgage payments. This is in addition to the money for the appraisal and inspection of the house (both are a must for any home buyer). Then you will enjoy paying to move all of your property.

At the end of the day, make sure you still have a contingency fund. Buying a home will likely come with a home warranty. But often, this warranty does not cover everything. You will still receive a service fee every time someone comes in to fix or just look at problems in your home.

2. Can you set a 20% down payment threshold?

I recently asked in another Forbes Post office, “Is the 20% down payment dead? “ As a financial planner, there is a difference between being able to make a 20% down payment and deciding to make such a large down payment. For potential home buyers who have been able to save a decent amount of money (like a 20% down payment), there is probably room in their budgets to buy a new home. For those who have nothing saved up, how do you handle if something breaks or you don’t get a bonus or a raise?

Additionally, depositing the full 20% can eliminate the need for private mortgage insurance (PMI), which can make monthly payments more affordable. By the way, this insurance does not protect you, but the lender. PMI will cost between 0.3% and 1.2% of the loan balance. So, assuming you buy a $ 1 million home, you could spend over $ 12,000 a year on PMI. As the price of your home gets higher, so will PMI premiums.

4. What percentage of your income goes to housing?

If buying a home encourages you to spend more than 30% of your income on housing, you may need more housing than you can afford. On the other hand, if your total cost of ownership is below 30% of your monthly income, you’re probably in good shape to buy a home.

5. What would you give up to buy this house?

The more money you spend on housing, the less money you get for other things you like. What do you have to give up on buying a house? Will you have to travel less? Cut back on your kids’ pastime? Reduce the rate of savings for retirement? Skip some time with your friends?

It really will depend on your priorities and financial goals. You may want to work for a few more years to live in your dream home. One of my clients hates traveling, so we took that part of her budget and sent her to build her dream home for retirement.

6. Will you have cash after the down payment?

Over the years, I have spoken to many people who said that they would not need anything new after moving. I can only say that they all needed something. Some of them needed new furniture because what they had didn’t fit in the new location. Others had to replace lost or damaged items. Plus, your new space deserves new décor, bedding, and more. Even simple things like hanging things on the wall or setting up a TV can quickly add up. Will you have money for such things after you move?

7. You don’t drown in debt

It’s crazy to expect people to pay off all their debts before buying a home. Let’s be real; some people reading this will likely have student loan debt seemingly forever. Others will have a car note most of the time. If you have payments under control, I don’t think having any debt is really that big of a problem.

Credit card debt is another matter. If you have credit card debt, it means that you are probably spending more than you earn; I would do my best to pay off this debt before buying a house.

8. Consider the ratio of debt to income.

I just said in the last section that you don’t have to pay all your debts before buying a home. While this is still true, this does not mean that your debts should not be considered when determining how much home you can afford. After all, these debts come with payments that need to be made.

If you have a high debt-to-income ratio, the amount of mortgage you can qualify for may be limited. Typically 43% is the highest rate that can be approved for a mortgage. You can test this by adding up all of your monthly debt payments and dividing them by your monthly income. This can be a tough pill for small business owners, as the income that the mortgage company will account for is less than what you think is your income, provided you do some tax planning along the way.

Buying a home is an important decision. Make sure you can actually afford the house so that if prices drop, you know you won’t have to sell cheap. You don’t want to be poor for the next 30 years.

[ad_2]

Source link