When new buyers start the process of buying a home, they often incorrectly estimate what homes they can afford to buy. Buyers frequently make the mistake of only thinking about the big picture rather than examining the details. You may already have a good idea of what down payment you can come up with and what you can afford to pay each month. However, other factors are in play when determining what you can afford to spend on a home in Northern Colorado. This week’s article will teach you the correct way to do the math and help you find a home you will love within your budget.
What Can you Afford to Spend Each Month on a Home in Northern Colorado?
The total purchase price seems like the natural place to start, but it’s not. When homes are listed, they show you a big number. That number can be daunting and misleading. It’s essential to establish your monthly mortgage allowance first. Remember that your monthly payments could vary between two homes with the exact same listing price. For example, monthly payments for a $500,000 condo may differ vastly from a $500,000 single-family home. Condo fees, taxes, and homeowner association dues significantly affect your monthly expenses.
Never begin your search with the statement, “I want to spend X amount of money on a home.” It takes more research and number crunching to determine if that amount will truly fit your monthly budget.
Get a Second Opinion— Don’t Automatically Accept What Lenders Say you Can Afford
Unfortunately, many buyers start with the overall asking price because their lender pre-approved that amount. Don’t think you’ve hit the jackpot if a lender approves you for a high mortgage. Lenders often approve you for the highest purchase price possible based on several “big picture” financial factors. Make sure you are comfortable with the amount you will spend each month.
Determine Your Down Payment
Once you know how much you can afford each month, you can factor your down payment into your overall budget. The good news is that the big ticket price looks a lot less scary when you start to do the math. Remember that every $10,000 you add to the purchase price only adds about $50 to your monthly payment. Consequently, that means you’re only saving about $50 a month for every $10,000 you add to your down payment. Even if you don’t have a huge amount saved, you may be able to afford a home with a heftier price tag than you initially thought.
Make a Monthly Budget
If you’ve never owned a home before, there may be housing fees and expenses that you haven’t considered. When you’re setting a monthly budget and figuring out what mortgage you can afford, consider the following:
- Costs of homeownership — property taxes, mortgage insurance, home insurance, utilities, condo fees, and parking fees.
- Expenses you expect to continue — tally up gym memberships, daycare payments, previous loans or credit card payments, gas or commuting fees, etc.
- Estimated yearly maintenance costs— plan to spend about 1% of your home’s purchase price each year. If you buy a $300,000 condo, you should put about $3,000 per year into the house for maintenance or set aside in a savings account.
- Tax advantages— As a homeowner, you’ll have deductions or equity in your home and can expect a larger refund at the end of the year.
- Additional expenses— Beyond your mortgage and maintenance costs, think about the expenses of moving into a new home. In the first few months of owning a home, you must budget for furniture purchases, decorating, and renovations.
Finally, think hard about what monthly expenses are mandatory for your life and general happiness. Alternatively, what lifestyle expenses can you live without? Don’t sacrifice your hobbies or passions so you can afford a more expensive house, but now is the perfect time to look at your expenses and eliminate waste.
Looking Into the Future
Don’t get me wrong, buying a home is a huge step and a very substantial investment. However, don’t dismiss the possibility of buying your dream home without running the numbers first. When deciding what you can afford to spend on a home in Northern Colorado, think about your goals for the next few years. If your career is taking off, it’s probably a good time to make a more considerable investment. Alternatively, if you or your partner want to take some time off work to raise a family, you should budget for that projected loss in income.
Nobody knows what the future will hold, but with the right people in your corner, your dream of owning a home can come true! Don’t hesitate to contact me with questions about calculating a monthly budget or any other part of the home-buying process!
I'm Lauren Haug! I'm a teacher-turned-real estate agent, and I teach people how to build wealth through real estate in Northern Colorado.
443 E 4th Street #100
Loveland, CO 80537
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