Broker Check

Buying a House: What Can You Really Afford?

| March 27, 2019
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The cost of buying a home is so much more than the monthly payment. Underestimating the true cost of owning a house is a major cause of stress for people. Just because you can qualify for a certain mortgage doesn’t mean you can comfortably afford that home. If you don't have a budget to maintain your home, you'll always have “unexpected” expenses that frustrate you and may even put you in financial trouble.

Owning vs. Renting

A super common example I see is with young people who are renting and feel tired of “throwing their money away” with rent. So, they look at the rent they are paying and equate that to the house payment they can afford. The bank and real estate agent are usually in agreement, and the shopping begins. Before long, they fall in love with a house and dive into this part of the American dream. What the new homeowners don't understand is all the additional things they are responsible for now that they own the house versus renting—and all the temptations they will have to spend money on their home.

Every single part of the house has a shelf life and will need to be fixed or replaced on a fairly predictable timetable. If the home is brand new, that makes it a bit easier because you have more time to save for your new roof, carpet, appliances, paint, kitchens, bathrooms, etc. If you are not buying a new home, you’ll need to make a serious assessment of upcoming costs. The expenses don’t arise every year. But some expenses, like a roof or driveway, are huge when they do come up.

I bought my condo nearly 8 years ago, which means all my appliances and the heating and cooling system are getting closer and closer to their life expectancy (generally 10–15 years). If I wasn't aware of that or wasn’t able to budget for what will likely be a $5,000–10,000 set of expenses, then I would be setting myself up for unhappy times. 

How to Calculate the True Cost of Buying a House

To determine how much house you can afford, don’t make the mistake of equating your rent payment to a house payment. Remember to also budget for utilities, maintenance, repairs, and improvements.

Your comprehensive home budget should include:

  • Your monthly mortgage payment
  • A separate line for each utility (electric, gas, water, cable/internet, etc.)—Tip: Request a utilities report from the previous homeowner to help you estimate these costs.
  • A budget for non-monthly expenses (yard maintenance, etc.)
  • A sinking fund for things that have a shelf life (appliances, roof, driveway, paint, carpet, etc.)—Tip: If you don’t want to take the time to estimate this amount, start by setting aside 5–10% of your home’s value.

In addition to budgeting for these extra home expenses, take a hard look at your future income growth and all the other things you want to do, have, and be in life. How will the cost of the home in money and time affect your ability to accomplish your other goals? This requires more planning and is certainly not the job of the banker or real estate agent. Take the time to map out what you want in life and make an informed decision about this major investment.

Mapping out a plan that looks at your future wants, needs, income, and expenses can help you make better decisions.

I've always been a planner at heart, and I’ve spent years studying finance to build my profession. Nothing has helped me come to these conclusions other than experience and the hindsight of lost monetary and time opportunities because of a house. When I was younger and owned a single-family home, there were many years that my savings goals were ruined because I had a big expense—cracked foundation, dead trees, etc. In hindsight, I realized that the true cost of home ownership was far greater than I had projected.

Whatever your goals are, it’s so important to take an integral view. How do the decisions and commitments you are making impact one another? How do they affect different areas of your life?

Want to brainstorm or work on your life map? Contact me online or email [email protected].

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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