You have wants and needs in mind for your new home, but can you really afford to pay for a home that ticks all the boxes? This is often the most difficult part of the home buying process.
Many so-called “rules” govern much you should spend on a home, but financial guru Dave Ramsey recommends a conservative approach that’ll keep you from getting too deep in debt. Ramsey suggests limiting your mortgage payment to 25 percent of your take-home pay or less. Sure, your realtor and bank will likely base everything off your pretax pay, but you must pay that mortgage from the cash that hits your bank account after taxes.
Using this approach, if your household take-home income is $4,000 per month, you should limit your monthly mortgage payment to $1,000. There are numerous mortgage calculators on the internet, but Dave Ramsey’s calculator is one of the easier ones to use, plus it helps you estimate taxes and insurance, which you need to include in your 25-percent budget.
Based on your $1,000-per-month budget, you can afford up to a $161,500 home on a 30-year mortgage. If you go the 15-year route, which lowers your interest rate but increases payment amounts, you can afford a $119,000 home.
Keep in mind, with this strict budget you may run into the unfortunate reality that it doesn’t align with your wants and needs. This means there are sacrifices you must make like mothballing that man cave or scraping the she shed to stay within your budget.