Thinking of buying a house? Perhaps you’re downsizing now that the kids are off and busy with their own lives. Maybe you’re finally getting that vacation home. Or you’re ready to help your grown kids with a generous gift so they can get started in their first home.
There are many reasons a home purchase may be on your horizon. As you start planning, it’s wise to map out a reasonable budget so you know what you can comfortably afford.
These three tips will help you figure out how much to spend on your next home.
Calculate cash on hand
You may have diligently invested over the years, but you’ll need liquid funds for the down payment and other closing costs. As you start to research homes, ask your real estate agent and financial advisors to help you come up with an estimate of money needed for deposits, closing costs, etc. Having this information will let you head into negotiations with confidence.
Figure out your new monthly expenses
Monthly costs for your new home purchase may be higher or lower, depending on the move you make. Either way, it’s wise to take a good look at your new or additional mortgage, renovation costs, property taxes, HOA fees, and utilities
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Also, think about a shorter- versus a longer-term mortgage. A 15- or 20-year mortgage may be a better option at this point in your life, but the monthly mortgage payment will be larger. A mortgage calculator is a helpful tool for exploring different down payment amounts, mortgage terms, and your monthly outlay.
For example, the national median existing-home price for all housing types reached $393,500 in March 2024, according to the National Association of Realtors (NAR)1. With a 20 percent down payment ($78,700) and a 6.9 percent, 30-year fixed interest rate, your monthly payment would be around $2,050. Change to a 15-year fixed rate and the interest goes down to around 6 percent, but the monthly payment goes up to around $2,650.
Check your credit score
If it’s been a while since you last ran your credit score and you haven’t made a large purchase recently, now’s a good time to check your score. The Consumer Financial Protection Bureau recommends reviewing your credit report from the three major credit reporting companies (Equifax, Experian, and TransUnion) if you’re planning to buy a home in the next six months to a year2. If you’re not purchasing your new home outright, you’ll need a mortgage pre-approval. The lower your debt-to-income ratio the better, especially if you’re retired or on a fixed income. A 36 percent ratio and under tends to be looked at favorably by lenders.
A little prep work can make the path to buying your next home smoother and less stressful. Discuss your assets and assess your potential new household expenses with your financial planner. Know your credit scores. Enlist me as your local real estate agent to get a realistic idea of current housing costs. Armed with this info, you’ll be able to decide what kind of home is right for you.
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