Budgeting for your home mortgage might turn out to be a challenging pursuit. Many individuals dream of purchasing an elegant abode. However, this shouldn’t be at the cost of your financial freedom, stressing you beyond your limits.
This explains why most homeowners use a mortgage affordability calculator before finalizing the budget. You can learn more from experienced professionals about developing a realistic property buying budget.
We have briefed up certain aspects that every property owner should prioritize in this article.
What Makes Proper Budgeting Crucial Before You Purchase A Home?
It makes sense to weigh your financial abilities before committing an amount for the mortgage payment each month. Besides, you might land up in trying circumstances with stagnant income, rising medical expenses, and various challenges.
While no homeowner would like to compromise with the luxury they have already been cherishing, it’s imperative to plan out the expenses, including mortgage payments.
- Accurate budgeting can help you avoid landing up in a debt trap. In case you have been shelling out hefty payments of interest on your credit card, you might struggle to pay the home mortgage. Your monthly expenses should not cross the disposable income as a thumb rule.
- Proper budgeting would help you achieve both short and long-term financial goals. For instance, you might want to purchase a car in the next three years. This implies that you need to make adequate savings. Besides, shelling out a high mortgage EMI might eat up your savings for retirement. Through budgeting, you can curtail unnecessary expenses and plan your finances logically.
- While you might be concerned about the down payment, budgeting ensures that you remain prepared for the challenges ahead. Medical emergencies, accidents, or other unaccounted expenses might force you to make compromises with your lifestyle.
Creating A Realistic Budget: How To Go About It?
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Aggregate Your Income
It’s best to calculate the overall incoming amounts in different accounts in the first place. For example, if you are applying with your spouse, calculate the monthly income of both persons. Then, collect the documents related to financial statements and find out how much you have been earning on average over the last few years.
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Track Down Your Expenses
This affair turns out to be much more challenging than calculating your income. First, consider your recurring monthly expenses such as utility bills, car payments, rent, prescriptions, insurance, household expenses, groceries, etc.
Besides, include irregular bills that you need to shell out semi-annually or annually, like insurance fees, car registration charges, and property taxes. All these expenses consume large chunks of your income significantly.
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Categorizing Fixed And Variable Expenses
At one point, you may have to find out how much room you have to wiggle and adjust to the demands. Now that you know how much you make and spend each month, you need to categorize fixed and variable expenses.
If the fixed costs account for a large part of your overall budget, you would have less flexibility and make lifestyle changes. For instance, you might move into a new city with a roommate or sell off your old car.
The fixed expenses include car insurance and payments, health insurance, TV, cell phone and internet bills, mortgage payment, etc. You cannot try and control these expenses in the long run.
However, it is possible to adjust the variable expenses that are not your needs but ‘wants’. These expenses include entertainment, gifts, dining, and travel costs.
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Calculate Cost Of Home Ownership
Owning a home comes with responsibilities. You need to calculate costs of repair, maintenance, and taxes. Again, there might be fees that you need to shell out to homeowners associations if you reside in such a property.
Accordingly, you need to list down your expenses and come up with a realistic budget. Once you add up the income and expenses, you can find out the amount you might be saving for the mortgage payment each month.
What Amount Should You Ideally Save For Your Down Payment?
The amount you need to arrange to make the down payment depends on your credit history and type of mortgage. Typically, this ranges between 3% to 20% of the overall cost of the home.
Now, if you go for a conventional loan and decide to make a down payment of less than 20% of the property value, your creditor would want you to purchase a PMI (private mortgage insurance).
If you want to save this amount, you need to shell out at least 20% upfront while purchasing the property. Before you settle for the property, weigh all the viable options on speaking to your creditor.
Budgeting Tips For Homeowners That Would Prove Beneficial
- If you are on a tight budget, draw a line between luxuries and necessities. In case you find expenses mounting, try and trim the luxuries for a few years.
- Take a look at hidden expenses that you might be making all these years. Do you spend your evenings at coffee shops or bars? How much do you spend each week on these expenses? Curtailing these expenses might help you afford a better home.
- Consider saving as much as is feasible by restraining yourself. Curtailing costs does not necessarily imply that you need to find new avenues to spend.
- Try not to use credit cards; they often lead to impulse purchases. When you pay someone with cash, you will be more mindful of your expenses.
- Debt management goes a long way in determining your home buying budget. If you have ongoing loans restricting you from obtaining a larger loan, try and close some of the personal or credit card loans.
Endnote
In the end, how much you can save and channelize your mortgage payment largely determines your budget. If you are not sure how much you should consider as the ideal budget for your new property, consult a professional to figure things out. A realistic property-buying budget ensures financial freedom and comfort with your lifestyle in the long run.
