03:27 How Much You can Afford
05:41 How Much You Should Spend in 2024
Welcome to 2024! This past year has been interesting. Rates rising, falling, rising higher, not falling, definitely inconsistent. Not to mention inflation. That’s all I’ll say about that.
So as we inch into 2024 I wanted to do something a little different than everyone else and talk about a topic that matters if you’re looking to purchase something this year. This isn’t an encouragement to go out and buy something – it’s more an introduction to a home buying philosophy that should help just about anyone that is interested in doing so.
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How much house you can afford depends on a few factors. Whether you’re looking for your first home to purchase, upgrading an existing home, or wanting to find that forever home, the dream house that our grandparents had with that big backyard. There are things that come along with a mortgage that you must consider and you may not be thinking about depending on your current situation.
Of course your mortgage amount is your first consideration. But that’s not the last line item on the budget – next come taxes, which can vary in different cities and counties, not just state to state, so make sure you look at this and consider it. Also insurance is a factor – and in the areas where I work we have a number of water ways that touch property, so some properties may require additional flood insurance as well. Next comes repairs and maintenance. If you’re getting a bigger yard, who’s mowing it? We bought a house two years ago, love that it has nice big mature trees, but I had to buy a new mower, a zero turn, just so I can get that thing done in one afternoon. Not only was THAT an expense, but the time is an expense. But if you’re hiring someone to mow, how much does it cost in the area where you’re moving? Different areas have different landscaping rates, look it up, that’s why I’m mowing my own lawn. Existing homes will have a bit more upkeep, but even newer homes will have maintenance in plumbing, HVAC, appliances, any number of things that make up day to day life. You can’t just call the landlord or property manager anymore, you’re not renting. Other expenses could be HOA costs, home warranties if you choose to get one, cleaning or upgrades to the home.
Now here’s the thing, your mortgage, taxes and insurance, even some other expenses can all be escrowed into one payment every month, and they’re likely not going to change too much year over year. But in places like Texas taxes can jump by 50%, and actually in Davidson County, where Nashville is in TN, taxes went up by 35% in one year. Granted home values also went up in Nashville during that time, so many folks that wanted to move were able to cash in on the equity that built up in that same time frame. Generally speaking though, this shouldn’t be a common occurrence. During the home buying process, you can have the home inspected, and this also will help you estimate maintenance needs and therefore put some numbers on those costs. All that said, let’s talk about budgeting for your purchase.
How Much You Can Afford
I’m sure you’ve heard of the 30% rule for rent. It basically states that you don’t want to spend more than 30% of your monthly income on your monthly rent. But this is an old theory, and has been adapted in a few forms for modern life where things like soaring school debt have become more of an issue. One more recent budgeting theory is the 50/30/20 Budget where you want to spend half your after taxes monthly budget on needs like housing, food, transportation, 30% would go to your wants like clothing, travel and hobbies, and the remaining 20% will go toward retirement planning, debt repayment and savings.
But another way to look at this, a nod to Graham Stephan, would be to back into this budget conversation starting with the fixed, non-negotiable things. Like food, transportation, debt repayment, insurance – anything you can’t live without. Include 15-20% for savings, 10% for miscellaneous spending, and then whatever is left over is what you have for housing. This will ensure that savings are happening, and you are putting the goal of buying a home before your other spending.
If that’s all too much to keep track of, another metric that I’ve heard is to spend no more than 20% of your gross income on your rent. And I guess at that point, just make sure you’re saving something for that downpayment when you find the right house.
But talking about mortgages, none of this goes into how your lender will pre approve your mortgage amount. Your lender needs to see that any retail debt you pay monthly plus your mortgage is less than around 45% of your monthly after tax income. This includes student loans, car payments, credit cards… So if you make $6000 a month after taxes – 45% of this is $2700. Say you spend $500 a month on that existing debt, they should approve up to $2200 for your mortgage amount.
This also means that if you don’t have any other existing debt, you can use the full 45% of your income, in this scenario, again up to $2700 a month, on a mortgage if you want to. Now, I’m not going to advise one way or another on this, but sometimes just because you can, doesn’t mean you should, and this is why I backed into this point at the end of this video.
How Much You Should Spend in 2024
In many places in the US it is less expensive to rent than to buy, or hold a mortgage. So if money saving is most important to you in short term, then renting may be a good option until you find a good enough deal to justify the cost. As an investor myself, it’s also important to know the history of property values in the area you would be buying in. Because if you can predict property value increases over time, then for all the reasons you want to own a home in the first place, that equity is going to make for a better investment of your funds than renting, long term. It really does depend on your personal situation and feelings, but I’ll end with one last thought on where 2024 will bring us, according to the information we have so far.
The FED has announced it plans to drop rates in 2024, 2025 and 2026. Based on this past year, I don’t know that we can rely on the existing information to persist through that whole time frame, but suffice it to say that if this is true, investments made now, will only be made better with the opportunity to refinance in the future at a lower rate.
Ultimately there’s no bad decision except one that goes un-made. If you’re looking into a real estate purchase, it’s always a good idea to identify your team and start doing your research, homework and budgeting now so that you don’t miss any opportunities that may arise. I partner with others myself – lenders, investors and mentors, even other agents that are likeminded and can help me keep an eye out for those deals we can’t pass up. Having a plan and a team in place the best way to make sure you can vet those opportunities and are ready to pull the trigger as they arise.
I hope this helps, and I’ll see you in the next one.