If you’re thinking about buying a property, you may wonder how much you should pay for a new home. After all, that can impact the size (and type) of mortgage you apply for.
The truth is, though, your mortgage is just one piece of the puzzle when deciding how much to spend on a home. To figure out what you can realistically afford, you need to understand all of your potential housing costs, including what may seem like unexpected costs that crop up when you own a property. That way, you can truly prepare for how much money it will take to cover your expenses as a homeowner.
So, there’s a good chance you’re a member of the club whose members are wondering, “How much home can I afford?” Read on for four important tips to help determine whether a home will suit your budget. Given how big an expense homeownership can be, you will likely want to be well armed with information before you start hitting the open houses and making bids.
Table of Contents
Key Points
• Buying a home requires budgeting for all housing costs — not just the mortgage payments.
• It’s helpful to list all possible expenses: down payment, closing costs, mortgage payment, property taxes, home insurance, mortgage insurance, and ongoing maintenance/utilities.
• Categorize these into upfront and recurring monthly costs to understand the total financial commitment.
• Evaluate the monthly housing costs against your overall budget to ensure financial health and continued savings.
• Always factor in unexpected costs, maintaining a three- to six-month emergency fund to prevent financial distress.
1. Calculate Potential Housing Costs
If you’re calculating how much you should pay for a new home, it can be an important step to write down all potential costs connected with buying a house and then paying the monthly expenses. This list can include:
• Down payment
• Mortgage payment
• Property taxes
• Homeowners’ insurance
• Mortgage insurance, if applicable
• Closing costs
Since the mortgage payment is typically a big-ticket budget item, it can be a good move to check out a few different options (say, fixed-rate vs. adjustable-rate; 15-year vs. 30-year terms) from a few lenders and at a couple of different amounts to get a handle on what that cost is likely to be.
Also, you may want to also make a list of:
• Expected repairs
• Planned updates/renovations.
Don’t forget about ongoing costs. It may be tempting to leave this out of your initial budget, but it’s unlikely you’ll find a place that won’t require some changes. These estimates could be a factor in your budget and your decision about what to buy. For instance, you’ll want to prepare for such expenses as:
• Utilities. If you’re moving to a house from a small apartment, you could be paying considerably more in, say, heating and cooling costs.
• Landscaping or other maintenance of your property beyond the house.
You’ll also likely want to make your new house a home, and there is nothing wrong with that as long as you’ve budgeted for the estimated expense. In other words, include the following in your calculations:
• Moving costs
• The cost of new furniture and furnishings (curtains, hardware, the works).
Although these latter expenses aren’t part of your required monthly housing payments, they’re worthwhile to keep in mind.
💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you through the process.
Estimate Your Future Housing Costs
Need help figuring out these costs in more detail? A home affordability calculator provides additional insight into how much it costs to purchase a home and the expected monthly payment associated with being a homeowner, including insurance costs, property taxes, and closing costs.
2. Determining What Is Paid Up Front
Now that you have an all-encompassing list of what you think a potential property might cost, both for a monthly payment and possible expenses, you can divvy up those costs into two categories: upfront costs and monthly costs.
Upfront costs include things like the down payment on the home and other fees such as closing costs and paying for home inspections. “When getting ready to buy a house, you may want to give yourself time to save up for a larger down payment. Buyers who put down less than 20% may end up paying private mortgage insurance, which typically costs between 0.3% and 1.5% of your loan amount annually,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. If you’re close to having a 20% down payment it might be worth pressing on to that goal before you begin your house hunt in earnest.
Monthly costs are your recurring mortgage payment, property taxes, and insurance(s), which may be rolled into the mortgage payment or paid separately. There are also other possible expenses you may pay down the line for furniture, repairs, renovations, etc.
This will help you get a handle on how much cash you will need to spend when going through the mortgage process and becoming a homeowner. And it will also tell you what it will look like to keep your home up and running, month after month.
As you consider how much you should pay for a new home, know that it may be wise to have a cash buffer as you go into homeownership. In other words, don’t clean yourself out when buying a home. You don’t want to risk overdrafting your bank account, and you need to be prepared for how inflation could cause your expenses to tick up.
Recommended: What to Know About Getting Preapproved for a Home Loan
3. Look at Monthly Costs in Terms of Your Budget
Once you have an idea of what your monthly housing costs could be, you can begin to fit those into your overall budget. One important consideration is the amount of debt you are paying off each month, so if you haven’t explored your debt-to-income (DTI) ratio, now is the time to learn more about this equation. Most conventional lenders like to see a homebuyer’s DTI ratio at less than 45%. You can figure out yours by adding up all your monthly debts and dividing by your gross monthly income. If your DTI is creeping close to 45%, it’s a sign you might have difficulty covering a mortgage alongside your other bills. In this case, you might want to explore paying down some debt before shopping for a home.
There are different budgeting methods, but most involve knowing and balancing your take-home pay, the cost of your “needs” and “wants” each month, and how much you are putting toward savings.
As you evaluate your projected homeowner figures, you want to ask yourself:
• Do the numbers work, leaving you with some room to breathe?
• Are you able to save for other financial goals, such as retirement?
• Will you be able to maintain your current quality of life, or will you have to make cuts to accommodate your new housing expenses?
• What do the numbers look like if you were to buy a somewhat more or less expensive home? (This can help you, especially if you are interested in a house that winds up in a bidding war and potentially selling for over the asking price.)
Overextending yourself in order to purchase a home is not recommended. Living paycheck to paycheck and worrying about money after you buy a property could take some joy out of your new nest.
💡 Quick Tip: You never know when you might need funds for an unexpected repair or other big bill. So apply for a HELOC (a home equity line of credit) brokered by SoFi today: You’ll help ensure the money will be there when you need it, and at lower interest rates than with most credit cards.
4. Considering Unexpected Costs
Being a homeowner can be wonderful and rewarding, but it can also be expensive and, at times, exhausting. Roofs leak. Hot water heaters fizzle out. Gutters need cleaning.
You may want to set proper expectations regarding not only how much homeownership will cost in terms of the typical expenses, but also in terms of the full universe of maintenance and potential costs. Budget accordingly.
Next, you might want to consider what could happen in the event of a job layoff. Even great employees can lose their jobs, so have a plan in the event that this happens. And how would you keep up with costs in the unfortunate event of illness?
If you have no plan for how to make a mortgage payment in the event that you or your spouse loses work, you might not be quite ready for homeownership. You may want to build up your cash reserve before diving in.
For instance, most financial experts recommend that you save three to six months’ worth of expenses in an emergency fund in case of a job loss, health emergency, or other financially difficult events.
Those funds can be vital to see you through a tough financial moment. And if you do have this amount of money set aside (good job!), don’t be tempted to raid it for, say, your down payment or other costs related to buying a home. It’s a very important bundle of cash to have on reserve.
Recommended: How to Shop Around for a Mortgage Lender
The Takeaway
Buying a house can be a huge rite of passage and a big part of adulting. As you contemplate owning your own home, it’s important to be sure you understand both the upfront and ongoing costs of homeownership and know how they fit into your budget. In addition, understanding the unexpected expenses that may crop up can be a wise move.
A key part of your calculations will be checking your mortgage options and how much that will cost you every month. This can be one of the big recurring costs to budget for.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
Photo credit: iStock/Tijana Simic
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