Planning to Buy a Home? Here's How to 'Test Drive' Your New Budget
If you aspire to become a homeowner, it's crucial to bear in mind that your expenses will change, and most likely increase. When you rent, you make monthly payments to a landlord and may need to provide a cleaning or pet deposit upon moving in (which may or may not be refundable, depending on your lease terms).
However, buying a home means taking on the full financial responsibility of homeownership, including not only the mortgage but also expenses like homeowners insurance, property taxes, and repair and maintenance costs.
Research from The Ascent found that in 2019, homeowners paid an average of approximately $717 more per month on housing costs compared to renters. This significant amount warrants careful consideration before committing to a mortgage and a major financial obligation. Let's explore how you can "test drive" your homeownership costs and even save some money for a down payment in the process.
The first step is to create a realistic budget. Look into home prices in your desired area and be honest about the type of home you want and the neighborhood you'd like to live in. This will give you an idea of the amount you'll need to borrow from a mortgage lender. You can also estimate property tax figures from home listings and use a credit score tool like MyFICO's interest calculator to get an idea of your potential mortgage rate.
Predicting homeowners insurance premiums can be trickier due to various variables, but you can ask local homeowners for their insurance costs to make an educated guess. Additionally, don't forget to budget for maintenance and unplanned repairs, which can amount to around 1% of your home's purchase price annually. If your area has homeowners associations, account for potential monthly HOA fees as well.
Once you have estimated all these costs, use a mortgage calculator (except for the 1% maintenance cost, which you'll divide by 12 and add to the mortgage total) to arrive at an estimated monthly housing cost. Ideally, this cost should be less than 30% of your take-home pay to ensure affordability.
To "test drive" your projected housing costs, start saving the extra money you would spend above your current rent. Set this money aside in a high-yield savings account, where it can grow over time. By living with these increased costs for at least three to six months, you'll gain real-life experience of what it's like to manage homeownership expenses. If your new budget feels comfortable, it's a good sign that you can afford to buy a home.
However, if you find yourself struggling to cover other monthly expenses or feeling restricted in your spending, it might be best to reconsider buying a home for now. You could work on increasing your income or explore options like buying a smaller home or relocating to a more affordable area.
Remember that purchasing a home involves significant additional costs you may not anticipate. While this experiment won't provide a perfect estimate, supplying accurate numbers will give you a good idea of your potential spending. Living with these costs for a while will also help you gauge how well you can manage the financial responsibilities of homeownership.
Source: The Ascent