Q. I am starting the process of purchasing a home. What are some mortgage guidelines as to how much I should spend?
Buying a home is an exciting time. And this excitement can easily lead us to overspend. With the historically low mortgage interest rates of today, even the most frugal buyer can justify spending an extra $25,000 on a home purchase. After all, it would only increase the payment by about $120 a month on a 30-year mortgage!
Mathematically, that’s true. However, suppose you stuck to your original home buying budget and invested the $120 instead? At a realistic 8% return for this long-term investment, $120 per month for 30 years would grow to over $180,000!
I recommend that home buyers limit their mortgage payment to 25% of their monthly take home pay and use a 15-year, fixed rate mortgage with at least a 10% down payment. By limiting your payment to no more than 25% of your current take home pay, you will have enough cash flow to spend in the other areas of life and will avoid being “house rich and cash poor.”
Will these mortgage guidelines lead to a more modest home than some of the on-line mortgage calculators say you can afford? Yes and that’s the point. Within a reasonable period of time, your home will be completely paid for! Then you can enjoy the increased monthly cash flow that comes with being debt free.
John is a CPA and personal finance coach. Email your questions to firstname.lastname@example.org.
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