As you plan the home you might wish to buy, it’s helpful to think through the impact of interest rate, taxes, and ongoing maintenance to help you set a reasonable budget.
Quick takeaways
Buying a house? It remains a financial goal for almost everyone. Over 80% of Americans want to own, not rent,
If buying a first home or buying your next home is on your horizon, it’s helpful to create a thorough budget plan that enables you not just to make a purchase, but afford it, too, so you can keep pace with other financial goals. Here’s a guide to the expenses you can plan for now.
General guideline: Try to keep your interest rate as low as possible.
Even small changes in interest rates can affect your monthly home loan costs. For example:
| Loan amount | Interest rate | Monthly payment (principal and interest) | Total interest paid over life of loan |
|---|---|---|---|
| $250,000 ($312,500 home price, 30-year fixed mortgage, 20% down, no taxes or interest included) | 6.5% | $1,580 | $318,861 |
| 7% | $1,663 | $348,772 | |
| 7.5% | $1,748 | $379,293 |
For illustrative purposes only.
General guideline: A higher credit score may equal better terms on a mortgage.
Your credit score impacts a lot of your financial life, including a mortgage. For starters, lenders factor your credit score into the decision to approve a loan, be it for a home, car, or personal need. A higher credit score is a more favorable factor, and a lender may approve a loan application faster, too. If you have a higher credit score—considered about 720 or above—you may qualify for a lower interest rate and save much over the lifetime of your loan. You may also qualify for improved repayment terms, such as lower down payment requirements.
Your credit score isn’t set; you can improve it by always paying bills on time, paying off debt, and limiting credit to just what you need. Use these ideas to
General guideline: A higher credit score may equal better terms on a mortgage.
The vast majority of home buyers must make some sort of down payment; the standard recommendation is 20% of the home price. Why? Doing so generally helps you avoid paying private mortgage insurance (PMI), which can add 0.5-1% to your loan (see chart, below). Very often, once you reach a certain equity percent in your home (typically 20%), you no longer have to pay PMI.
However, putting 20% down isn't doable or desirable for everyone. What’s good to keep in mind is that both your down payment and your monthly payment help you build equity (i.e., ownership) in what’s likely to be the biggest asset you’ll own.
| Down payment comparison | Loan option #1 | Loan option #2 | Loan option #3 |
|---|---|---|---|
| Home price | $250,000 | $250,000 | $250,000 |
| Down payment | 5% | 10% | 20% |
| Total loan amount | $237,500 | $225,000 | $200,000 |
| Interest rate | 6.5% | 6.5% | 6.5% |
| Monthly PMI (1%) | $198 | $187 | $0 |
| Monthly payment (principal, interest, PMI only) | $1,798 | $1,703 | $1,264 |
For illustrative purposes only. Assumptions: 30-year fixed rate loan, monthly payment only assumes principal and interest and PMI (if applicable); taxes and insurance depend on your location and influence your payment amount substantially.
General guideline: Plan to spend no more than 28-30% of your income for your monthly home payment, which includes mortgage, PMI, taxes, and insurance.
The biggest chunks of a monthly home payment are typically the mortgage and interest amounts. But there are other regular costs, too, some of which are often included in your monthly payment. Those include PMI (described above, if applicable), property taxes, and home insurance. You may also choose to weave one-time charges such as an origination fee and title work into your monthly payment, too. Include that total, not just the loan amount, in your monthly home budget plans.
General guideline: Set aside 1-2% of your home’s value (separate from your
Of course, there’s more to consider with a home buying budget than just mortgage and monthly payment. All homes require maintenance over time; you may also wish to make cosmetic or more extensive changes to living space. There are appliances and tools to buy for upkeep, too. Estimating what you’ll need for regular repairs and maintenance is tricky; the guideline above can help you get started. (For a $250,000 home, that would be at least $2,500.)
As you take stock of what you can afford and what homes you are interested in, it’s helpful to think short- and long-term about your finances and goals. Do you have adequate savings to help you stay in your home, should you experience a job loss or change? Might you increase the size of your family, or will you be an empty nester soon? Does your home budget still allow you to save for other financial goals—retirement, for example? The choices you make and the changes you’ll go through will affect your financial planning, now and in the future.
A financial professional can help you plan ahead (for buying a home and more) and work through questions you might have as you go through stages in your life. Don’t have a financial professional?
