How Much Should You Be Spending on Your Mortgage Each Month?
Typically, the single largest investment that you will make in your life is your home. Whether you are a new home buyer, sizing up for a growing family, or downsizing in retirement, be sure that you are able to maintain good financial health.
Well before you start looking at homes, make sure that you understand the scope and limitations of your budget. Some basic principles to apply to your calculations of the amount of a mortgage you can afford are directly related to the required down payment. The less you owe and the longer the terms of the loan, the lower your payment will be. So what is the amount you can afford?
Understand Your Debt-to-Income Ratio
Lenders will have algorithms, such as debt to income (DTI) and other methods of determining the risk associated with how much they should lend you. Consumer reports and other financial advisers typically recommend that your loan should not exceed the range of 25-35% DTI.
However, your DTI is in constant flux as you pay off liabilities and acquire new obligations. So what you need to consider is the direction of financial health over the term of the loan. Just because you can currently afford your payments does not mean you should take out the maximum.
When calculating your budget, make sure to keep in mind the financial stability it will require. A wise plan is to accumulate a year’s worth of house payments before you purchase. This stockpile can help bolster your finances should any unexpected event occur. If a year’s worth of payment sounds overwhelming, it might be wise to recalculate how much mortgage debt you should take on.
Know All of the Items in Your Monthly Payment
Additionally, it is imperative that you understand the items that are included in your loan payment and that those items will change over time. Your payment is comprised of insurance, property taxes, homeowner’s association (HOA) fees, interest payment, and principal payments.
A large asset, like your home, will often increase in value over time. The increase in property value directly impacts your tax obligation. So as you reap the benefits of your enhanced value, you will owe more in taxes. What was once an affordable payment may now be unsustainable.
Your homeowners insurance may also change your payment over time. It is possible that it may decrease but the reality is that is more than likely to increase. With an increase in the value of your home, consequently the premiums for that home are greater. Be sure to include HOA fees. HOA boards have the ability to raise fees to cover costs when needed. They can simply assess the owners for capital improvements to structures, paving, or amenities, like a swimming pool. These costs are unavoidable and difficult to anticipate.
The bottom line is that you need to have a payment that fits comfortably enough in your budget to allow you the flexibility to cover unexpected costs in the future. Position your finances strategically to ensure that you can cover expenses, save as needed, and comfortably handle variations in your monthly obligation.
Do you have questions?
Count on your experienced team at Ericson, Scalise & Mangan, PC to provide you with sound guidance for your Estate Planning, Elder Law, Real Estate, Probate, Trust & Estate Administration, and other legal needs. For assistance, contact us today at (860) 229-0369, or email us at info@esmlaw.com.
