If you are planning to have a mortgage, you must also understand how you can manage and budget for your mortgage payment. If you are someone who travels a lot and has other things that cost money, you must consider budgeting. It is so because you do not want to get stuck with a loan and risk anything. To understand this, you have to learn a few important things to create a budget.
One of the best ways you can find how much you can afford is by comparing your monthly budget and potential monthly mortgage payment. Let’s break down some other factors you can follow to plan your mortgage budget.
Break Down Your Mortgage Payment for Each Month
“Your monthly mortgage payment is often more than you owe your lender. It includes your principal, interest, taxes, and insurance. It is popular as your PITI.
- Principal: This money goes towards the actual balance of your loan.
- Interest: This money goes towards paying interest on your loan.
- Taxes: Real estate or property taxes are often determined locally. It is so because they vary from region to region. Taxes can be quite expensive in some areas so it is a good option to research rates first since they can add majorly to your monthly payment.
- Insurance: This involves title insurance and homeowners insurance. It can also include flood insurance and mortgage, based on your financing and location.
Some properties may also demand Homeowners Association Fees (HOA fees). These may be hundreds of dollars per month. Hence, you will want to remember this when searching for homes and evaluating your budget.” Says Brian Bosscher, owner and founder of Condo Control
When you ask your lender for a Loan Estimate, you can see your projected monthly payment. However, that may not include each line item in your PITI. Keep in mind to ask your lender for your PITI. It will help you to have a good idea of what you will be required to pay each month.
Examine Your Monthly Budget
It is not just a good financial practice to create a monthly budget. It is also a great way to assess how much more you can afford financially. If you have never created a comprehensive budget, follow these things.
- Determine your total monthly income. This money is what goes into your bank account every month. These may include monthly benefits, salary, child support, or alimony.
- Determine your fixed expenses. These expenses are the ones that occur every month. These may include child care, utilities, gym memberships, monthly rent, and other monthly subscriptions.
- Factor in your irregular expenses. They do not occur monthly like holiday shopping, gifts, haircuts, and annual dues or subscriptions. You should estimate your yearly total and divide by twelve to account for these expenses in your monthly budget.
- Account for your non-compulsory spending and savings. Consider how much extra money you use every month. Or, how much do you spend on travel, house decor, art supplies, and clothes? Do not forget to include your passions in your budget. It is so because these items need to be balanced when you are taking on new financial responsibilities.
Evaluate What You Can Afford
“You can evaluate how much you can stretch them comfortably. Try to find the new expenses after owning a home within the limits of your existing savings and budget. Consider some questions like, Can you cover HOA or condo fees? Or, will you have enough savings to encounter emergency repairs after your down payment? If you are moving into a bigger space, imagine what your new heating and electricity bill will be. If your landlord used to cover your water bill before, you also have to include that in your monthly budget now. If your budget starts to look tight, consider if there are things that can be cut.
If your extra spending keeps you happy, do not sweat it. You may only have to reevaluate the property types you want to buy.” Says Daniel Cabrera, Owner and Founder of Sell My House Fast SA TX
Adjust Your Budget If Needed
“While calculating your monthly mortgage payment, you should adjust your budget to accommodate it. There may be chances that your monthly expenses are more than your monthly income. Or, these payments may be higher than you expected.
If your monthly mortgage payment is more than your monthly income, you should consider ways to minimize your expenses. You can otherwise increase your monthly income. This may include cutting back on extra expenses. These may include the number of times you order take-out food instead of cooking at home. You can also find an additional income source such as a freelance gig or a side job. This could also mean you should find a cheaper deal for your internet plans or phone packages.” Says Benjamin Foster, Senior Manager at UK Expat Mortgage
Practice Your Payment
Knowing the numbers is one thing, and a mortgage bill coming every month is another. You can try practicing your mortgage payment. It will give you a true sense of how purchasing a home will influence your monthly budget.
If your estimated mortgage payment goes beyond your current rent, you must start saving your extra amount every month. It will stimulate making mortgage payments. If your budget does not get comfortable, you should reconsider the type of home you are looking for.
Ensure You Build an Emergency Fund
“No one ever predicts what kind of unforeseen expenses might come your way. Have an emergency fund which will be a safety net for you in case of any car repair, job loss, medical emergency, or any other unexpected event.
Evaluate how much you should aim to have for your emergency fund. A nice way to create a goal is to aim for three to six months’ worth of expenses. This may sound too much but there is no need to worry. Start small and slowly build up your emergency fund. Just remember to set aside some amount every month to accomplish your goal.” Says Rudy Bush, Founder at Wiringo
Moreover, make sure that you keep your emergency fund in a different account that is easily accessible. In this way, you can instantly access the funds. Start saving now and you will be happy you did when there is any uncertain situation.
Conclusion
Understand your monthly expenses and income, calculate your monthly mortgage payment, and adjust your budget. Make sure to stay on track and build an emergency fund. It will help you to know whether you are in a good financial position to make your monthly mortgage payment.
With this calculation, you can understand what type of home you can afford. Most importantly, do not calculate this number on your own. Use different tools to help you find the exact budget.