You’re eyeing center-hall
colonials in your neighborhood and dreaming about the garden you want to plant in
the backyard and all the holiday celebrations you’ll host. You’ve saved toward this
goal and think you’re ready to pull the trigger. But the real question is: How much
house can I afford?
Or is it?
Perhaps a better
question really is: What else do I want to afford? In other words, do you want to get the
most house possible, with little left for a new car — or that European getaway
you’ve been learning Italian for? It’s important to take into account your goals
and lifestyle as you consider this important decision.
And a huge consideration should be your retirement goals.
What will you appreciate more: an extra bedroom, larger yard or an early start
to your retirement?
While a house is an asset that can be a savings vehicle
and wealth-builder, it’s not especially liquid, flexible or portable. And if the
housing market deflates, it can cost you. So, it’s important not to get in over
No Magic Number
Many financial planners advise budgeting no more than 28%
of your gross income toward your mortgage and no more than 36% of your income toward
all of your debts combined. That mortgage cost includes principal and interest as
well as taxes and insurance (PITI).
Another common formula dictates that most people can afford
a mortgage of 2 to 2.5 times their annual income. By that guideline, a person earning
$60,000 a year would be able to afford about a $120,000 to $180,000 mortgage payment.
Look at the Big Picture
Remember that these are only starting points for making
a decision. There are additional costs beyond PITI to keep in mind. HOA dues, maintenance,
upgrades (even small improvements add up), commuting costs and school quality all
should be considered.
Also, how long a loan do you want? 15 years? 20? 30? With a shorter-term
mortgage, you’ll pay more each month but significantly less over the life of the
loan — and you’ll get out of debt sooner. But be very careful about using an Adjustable
Rate Mortgage (ARM) as the means of affording more house. With mortgage rates at
historic lows, they are likely to go up at some point in the future.
Get Some Professional Advice
Finally, review how much you’re currently saving for retirement.
Balance that against potential returns from the eventual sale of the home. While
houses have generally been good investments historically, it’s very hard to predict
values for a particular neighborhood 10 or 20 years in advance. If you think you
may want — or need — to move in the near future, you may be rolling the dice. Balance
the above factors. Buying a house is committing you to a monthly payment and lifestyle
not only for today, but also in the future.
Choose wisely. Run the numbers. Talk to your advisor.