Figuring out the home you can afford

How much can you afford to pay each month for your future home?

This question helps you make a sustainable decision about how much to borrow as you start your housing search. Your mortgage may be with you for as long as thirty years, and protecting your credit means making those payments on time, consistently, throughout the life of the loan. In addition to your mortgage payments, you will also have maintenance and utilities costs. Factoring those costs in early can protect you from financial problems down the road.

To start answering this question, let’s take a look at your budget.

Update your budget.  You need a good, realistic starting point as you study your own financial behavior. Costs change, and financial habits change too. If you haven’t updated your budget in a while, now is the time.

Pay close attention to how your family’s spending habits have changed, or are expected to change in the near future. Are you spending more of your discretionary income than you realized? Sort your recent spending into different categories, so that you can determine which spending areas are growing, and which need to be cut down.

Take a look at your other goals. Which financial goals, besides home ownership, are you currently prioritizing? Do you still have room for them in your budget? Does home ownership come first at this point in your life? When you are clear on your choices, you can move forward on your home purchase with greater confidence.

Add or subtract goals from your family budget as you and your spouse see fit. What you have remaining in your budget, added to your current rental/housing costs, is what is available for your future home.

Plan for maintenance and utilities costs. Do you think that your power and water usage will drastically change once you move into your home? Will you be moving from a smaller housing situation to a larger one?  Talk to family members and friends who are homeowners, and ask them about their usage and costs for utilities and maintenance. Try to use the numbers from people who have a similar family size and habits, and figure them into your budget.

Remember property taxes and insurance. Monthly mortgage payments include not only the principal and the interest of the mortgage, but also property taxes and homeowner’s insurance. These costs will depend on the value of the home. It’s something to keep in mind as you look at the monthly funds available in your budget.

Adjusting your spending habits. If you know that you want more room in your budget for your future home, it’s time to review your spending habits. Look back at those categories, and start making small cuts to different categories in your discretionary spending. Target areas of your spending, and think about alternatives to those costs. Take some time to become acclimated to a new spending level, so that you don’t fall back on old habits when the mortgage payments come due.

Many factors determine the amount you can ultimately borrow: the quality of your credit, the amount of debt you have, your savings, and your gross income. But a firm understanding of your own household budget will provide you with an important starting point in talking to lenders about your home-buying dreams.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at


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