Budgeting for a home: How much can you afford?

Two men moving into their new house together.

A home is almost always one of the biggest purchases you’ll make in your lifetime. That’s why it’s important to do your research before you buy. 

Make sure you can comfortably afford the monthly payments—and the other inevitable expenses that come with home ownership—while still keeping your overall financial goals on track.

Look at the big picture.

“When you buy a home, it isn’t just about the monthly payment you can afford,” says Heather Winston, assistant director of financial advice and planning at Principal®.

“Buying a home is a significant decision and it shouldn’t be made without considering how it will impact other parts of your life. It’s not just the financial commitment but the emotional one too. Covering a mortgage is one of the biggest expenses you will have. The choice of what to buy will certainly have an impact on other goals in your life,” she says.

Think about both your long-term and near-term plans. For example, how stable is your current job? Is there a possibility you might relocate for work in the next couple of years? Do you have parents or children to consider in this decision? If you like to entertain or have visitors stay, are you thinking about other costs for things like furniture, appliances, and lifestyle goals you might have too?

Limit the percent of income you spend.

Most experts recommend spending no more than 25–35% of your income on housing. That figure includes not just the mortgage, but also insurance, taxes, and maintenance. (Maintenance alone may cost 1–2% of the appraised value of the home each year.) For assistance determining how much money you can borrow for a mortgage, check out a calculator from Bankrate.

Some lenders may encourage you to spend more. But even if you’re approved for a high loan amount, it may not be the best idea. For most people, spending more than 25–35% of their income on housing means there’s not enough money left for other financial goals.

Set aside your savings first.

“Allocating money to a mortgage means you can’t use it for other things—like education or retirement savings, or more immediate wants and needs like travel or a leaky roof,” Winston says.

“It’s not just how much can you afford today, but how much you have left over once you pay yourself first.”

Before you settle on an amount for your mortgage, factor in enough retirement savings contributions to maintain the lifestyle you want when you reach that time in your life.

Contribute up to the maximum amount for any employer-matching contributions to your 401(k) plan, or plan to invest the full allowable amount into a traditional or Roth IRA each year.

And don’t forget about saving for other financial goals, too. These might include building and maintaining an emergency fund, contributing to your children’s college educations, paying off credit card debt, or even saving for family vacations.

Only when you’ve factored in the savings you need—not just your immediate expenses—will you know how much mortgage you can realistically afford. And though the price range for your new home may not be as high as you hoped, rest assured that your financial health—and your family’s well being—will likely benefit long into the future.

Is your financial house in order? Start by making a plan:

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

​Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392.