Probably the biggest decision that most people make is when they buy their first house or their next house for that matter. So why is it that most people rely on the bank to tell them how much house they can afford? The bank looks at it from the risk of not being able to collect the mortgage payment. This is a critical point, but it does not consider whether it is too much of an expense for you to properly budget for the rest of the things in your life.
When the bank puts a cap on the most they will lend you, they usually indicate that up to 25% of your income can be put towards debts. They will group any credit card debts and car loans you have and then figure out what is left to pay a house note. So if you are handling the budget properly, and do not have a car loan and pay off your credit cards every month, then the bank will say that you can spend 25% of your income on a house note. They probably are figuring insurance and taxes into this 25%, so they still may be telling you that you can buy a house for up to three times your income or more. So, if you are earning $100,000 a year, they say that you can borrow as much as $300,000.
This is reasonable from their perspective and means you should be able to meet your budgeting goals and not default on your loans. The problem is that you will be obligated to pay this debt and will not be able to put enough away for retirement specifically due to this large house note. If your income is $100,000 per year, then you are earning $8,333 per month. You will be paying 25%, $2083, of that towards your house. Then after you pay for taxes, utilities, car expenses, food, etc., you will be lucky to be saving $500 a month towards retirement. So instead of borrowing 3 times your income, you should be closer to 1.5 – 2 times your income. If you are able to limit the price if the house you are buying to $150,000 borrowed plus a down payment, you will have an extra $1000 per month to be saving for retirement. This is huge and can make the difference between reaching your goals and failing to reach them. So restrain yourself when you buy a house and aim for houses less than double your income. Try to put a 20% down payment and you will be setting yourself up to succeed. Estrace Adalat