People who wish to buy a new home find it very difficult to analyze how much money they should spend on it. Real estate investments are considered to be extremely effective in the long term and are less volatile than stock market investments. However, buying property at the right location and at the right price is essential to earn substantial profits. At the same time, you should keep an eye on how much you require to spend to buy a proper. The most common mistake which most people commit is that they stretch their finances too much to buy homes. This naturally increases the burden of monthly installments and causes credit crunch for these people. If you end up paying most of your salary as monthly installments, to banks and financial institutions, then you will have very less cash left with you and this can be a big problem in times of emergencies. The home affordability rule of thumb has helped many people realize their buying potential and take correct decisions. The rule of thumb actually suggests you to take a home loan which is two and a half times to five times of your total annual income.
Deciding How Much to Spend on a House
Deciding how much to spend on a house is quite tough at times. You see a property and you like it so much that you are willing to pay thousands of dollars more for it. However, a word of caution is that you need money for other purposes in life such as education, entertainment, general monthly living expenses and savings. So, many financial advisers say that the debt to income ratio should not be in excess of thirty six percent for all home buyers. Apart from this, you should have at least six months salary in cash in your savings bank account. This cash, along with the interest you earn on it, will be very useful to deal with the sudden expenses which might emerge in the course of life. All those wising to buy a house should also have some smart investments in gold, mutual funds and saving schemes to ensure good liquidity whenever necessary.
Your choice of home will depend on your yearly income. If the income is high, naturally your purchasing power would be more and hence, you would be in a position to buy an expensive home. You will have to compromise on your home price if your income is fluctuating, or not constant. You also need to take into account the existing loans you have taken and how much interest you are paying on them. The tenure of these loans should also be taken into consideration before you apply for a home loan, as home loans are of long period. So, your car loans, personal loans and credit card loans should be taken into account before you opt for a home loan. Ideally, the home loan amount should not be more than five times your yearly income.
There is a specific calculator that explains how much house you can afford, which will subtract all your mandatory expenses from your total income and give you the investible surplus. The following items will have to be treated as expenses while deciding how much loan you can avail:
- Investments
- Real estate taxes
- Alimony paid
- Car payment
- Credit card payment
- Other debts
- Wages paid
- Insurance paid
