The purpose of this post is to look at two financial rules of thumb for buying a home that can protect you from making a big mistake.
Rule of Thumb # 1 for Buying a House = 10 Years
Before even considering buying a home, make sure you’re prepared to live stay there for 10 years. If you’re likely to relocate inside of 10 years, you’re better off renting.
If you haven’t thought that far ahead, try to answer the following questions:
- How is your job security?
- What are the chances you’ll have to relocate for your job?
- Have you ever dreamed of living somewhere else, but didn’t think it was possible?
- Is it likely that you’re going to change careers in the next 10 years?
- Will you outgrow this house in ten years?
- Will this house be too big for you in ten years?
- Will you want to move to get into better school districts?
The ten year rule of thumb might sound conservative to you, but I promise you it’s not. Just look at what has happened in the past five years in the housing market.
Rule of Thumb # 2 for Buying a House = 28% and 36%
If you really want to know, “How much house can I afford based on my income” here’s your answer–your principal, interest, taxes, and insurance on the house shouldn’t exceed 28% of your monthly income AND your total debt payments should never exceed 36%
The total amount you could afford, i.e. $250,000, will vary depending on what interest rates, taxes, down payment, and insurance premiums are at the time of purchase. The important thing to keep in mind isn’t to exceed that 28% or 36% mark.
This will seem small compared to what your mortgage broker or real estate agent might tell you, but do they really have your best interest in mind? A good mortgage broker or real estate agent is very helpful to the home buying process, but still, they shouldn’t be giving you financial advice. The more you buy, the more they make.
One more thing, if you’re currently a two income couple, who plans to have kids, in which one of you will be a stay at home parent, don’t calculate how much house you can afford based on both of your incomes. Since you’re going to be living off of one income in the future, only use one income to determine how much house you can afford.
How Much House Can I Afford Based on My Income?
Even if you plan on living somewhere for ten years and you can afford to buy a home for 28% of your income, don’t automatically think you have to buy a house. A house comes with a lot of responsibilities.
A day will come when you have to make a decision to do maintenance on the house or spend the money on something you enjoy. When the estimate for repairs is sitting on your kitchen table, and you have to make a choice, what will you decide?
In the comments, for those of you who have bought a home, what rules of thumb did you use? Did you make any mistakes? What did you do well?
For those who haven’t bought a home, would love to hear if you ever plan to buy. I know a lot of Gen Y’ers, who plan on renting for the rest of their lives. If so, why?