The term “house poor” refers to someone who spends so much on their home they struggle with all their other expenses. While a home is usually a good investment because it allows you to build equity, you also have to keep an eye on your finances.
By carefully selecting a home that’s affordable and taking into account all additional finances, you can live a more comfortable life.
Set Your Own Budget
When you get pre-approved for a mortgage, the bank usually tells you how much they think you can afford. In most cases, this amount is around 30 per cent of your monthly income, or 42 per cent of your income if you include other debts like credit card payments and student loans. However, you’re the only one who knows how much you really can afford. If you’re working hard to pay off your debt or you like to take elaborate vacations, you might not be able to afford as much as the bank says you can.
Understand Your Mortgage Payment
Paying back the principal balance on your mortgage is only a part of your total monthly payment. The payment will also include homeowners’ insurance, property taxes, and condo fees. These can add a couple of hundred dollars on top of the loan payment. If you’re not factoring them into the equation, you may end up agreeing to a mortgage that’s more than you can comfortably afford.
Give Yourself Wiggle Room
The bank will give you a maximum amount they think you can afford each month, and we’ve already mentioned it’s smart for you to make your own calculations about what’s affordable. However, think twice before you take on a mortgage for the maximum amount you can afford. Doing this can stretch your budget pretty thin, and you might not have a lot of extra money. If you choose a house that’s $100 less than your maximum, you’ll have more freedom to spend on extras or be better able to weather any financial storms.
Make Sure You’re Ready
Too many people are quick to jump into buying a home once they have their five percent down payment saved up. This can be a big mistake. When you close on your home, you’ll have to pay about three per cent of the cost of the home in closing costs. This is on top of the five percent down payment you need. You’ll also need money to pay for the movers and to buy a few new things for your new home. It’s smarter to wait until you have a good financial cushion before purchasing a home.
Don’t Buy a Money Pit
Resale homes can be affordable, but they often come with many problems. If you’re not really the DIY type, a home that’s not in good condition can cost you thousands of dollars you weren’t expecting to spend. Prevent this by getting a home inspection before you buy a resale home or by purchasing a brand-new home.
Avoid Adding Extras
If you do choose to build a home, you often have opportunities to include upgrades. Many upgrades only add $10 or $20 dollars a month to your mortgage payment, so it’s easy to say yes to the things you want. If you choose too many upgrades, though, your monthly payment is suddenly $100 or $200 more than you thought it was going to be. Make sure your builder knows your budget and is willing to help you stick to it.
Get a Roommate
Most people think that once they buy their own home, they’re leaving their roommate days behind. This doesn’t have to be the case. Many condo floor plans are specifically designed for roommates. With a roommate, you can get some much-needed help paying the mortgage while still building up some equity. These rent payments can either reduce your portion of the monthly payment or they can go toward the principal balance so you’re building more equity.
Focus on Your Career
While there’s always a lot said about cutting back on costs to make your home affordable, it’s also smart to look at the other side of the equation: your income. The more money you earn, the easier it is to afford your home while still putting money aside for savings and other things you might want. Don’t neglect your career. Even if you’re happy with what you do, keep an eye out for ways to move up.
Buying a home is a big financial commitment, so it’s not something you should get into without a lot of serious consideration. Think carefully about how much you can afford, and commit yourself to buying a home within that price range.