When you decide it is time to buy a new home, one of the first steps in the home buying process
should be determining a price range. Resources such as online calculators
, financial advisors, and mortgage lenders
can all help you determine a realistic maximum home price that will fit your financial situation. Even with a specific price range in mind, it can be tempting to view houses that exceed your budget. But doing so could leave you falling in love with a house that you simply can’t afford. Although you may consider stretching your budget to purchase a home outside of your price range, experts warn that this is a bad financial move
. Let’s take a closer look at why staying within your budget is your best bet.
Short-Term Disadvantages of Buying a Home over Budget
Only considering homes that check off all the boxes on your “want” list might seem like a good way to approach house hunting. However, once you have purchased a home and begin making monthly mortgage
payments, you might wish you had forgone that extra bedroom you’re currently using for storage. Remember that a lower-cost home will mean lower mortgage payments.
Some immediate adverse effects of buying a home over your original budget can include:
• No wiggle room in your budget. If you buy a less expensive home that doesn't take up a large percentage of your budget, you will be able to adjust to changes in your financial situation much more easily than you would with a massive mortgage payment. With a large mortgage payment, you may find yourself having to stick to a strict budget, or having to cut back on certain expenses. It’s also important to remember that you never know when unexpected expenses will hit. Without sufficient flexibility in your budget, you may have trouble financially dealing with medical emergencies, layoffs, or unplanned repairs.
• Little money for home renovations and routine maintenance. The costs associated with home ownership don't end with the purchase of the property. Many home buyers like to make cosmetic changes, or upgrade appliances after buying a new home. Even if your home is “move in ready”, chances are you’ll have other home-related expenses such as moving, decorating, or landscaping costs. Having to pay a large down payment on a more expensive home could take a big bite out of your savings, leaving little room for such expenses. And, a higher monthly mortgage payment can make it difficult to carve out room for them in your budget. For this reason, it’s a good idea to factor in all of your anticipated home-related expenses - no matter how small - when calculating how much house you can afford.
• Potential harm to your credit. Taking on a large amount of mortgage debt could potentially wreak havoc on your credit score. Your debt-to-credit ratio is an important part of your score, and carrying a large mortgage balance could negatively impact it.
All of these disadvantages can ultimately lead to financial stress if they get out of control. Knowing that your home is putting you into a fragile financial situation can cause you a great deal of anxiety in many aspects of your life. Worrying about whether you will be able to make your mortgage payment each month takes away from the joy of owning a home.
Potential Long-Term Impacts
Taking out a home loan is typically a long-term financial commitment, with most mortgage terms ranging from 15 to 30 years. Buying an expensive house won't only lead to short-term drawbacks, but it could cause future financial harm as well.
One thing to consider is that if you purchase an expensive home without a substantial down payment, you run the risk of ending up "upside-down”, or “underwater” on your mortgage. This can happen if home prices decline and you end up owing more on your mortgage than your home is worth. This not only makes it impossible to tap into home equity, but it can make it difficult to sell your home as well. Being underwater on your mortgage is also dangerous from an insurance perspective. Most homeowners insurance policies will only protect your home up to its current replacement value. If your home is damaged or destroyed, and the payment you receive from your insurance company is less than what you currently owe on your mortgage, you could be stuck paying the difference.
Another consideration is that if your monthly mortgage payments are so high that they become unmanageable, you could potentially make late payments, or miss them altogether. Doing so could cause your credit score to take a nosedive, not to mention put you at risk of foreclosure or bankruptcy.
Making Wise Purchase Decisions
Buying a home is a life-changing decision. Although it can be exciting, it can also lead to financial distress if you stretch your budget too thin. As you consider the price range you will use to find your new home, be mindful of how it will affect you in the future. Your best bet is to choose a home that you believe you can comfortably pay for, even if your financial situation changes slightly or unexpected bills arise.
Your home is a major part of your life so it is understandable for you to want it to meet all of your “must-haves”. However, if there is any concern that a mortgage amount could spread your finances too thin, it’s likely time to look for a different property. Again, the costs associated with a new home don’t typically end when you sign the mortgage. Consider the whole financial picture when determining how much home you can afford.
If you have questions about affording or financing a new home in MA or RI, don’t hesitate to reach out to one of our dedicated mortgage experts today.