Buzz
If you're in the market for a new home during the pandemic, you're certainly not alone. Thanks to historically low mortgage interest rates and the rise in remote work, many people are considering upgrading their living spaces. In fact, sales of existing homes saw a 20% increase in June, with a 25% surge in July, as reported by the National Association of Realtors. However, buying a home involves more than just paying the monthly mortgage—costs like property taxes and homeowner’s insurance premiums also rise over time.
Homeowners must also budget for routine repairs and maintenance, which average $1,105 annually, according to HomeAdvisor’s 2019 State of Home Spending report. In many cases, homeowners may spend even more, so experts recommend setting aside 1-4% of the home’s value each year to cover these expenses.
There’s no question that purchasing a home can be a risky endeavor, especially if it requires stretching your budget, and this risk is heightened during an economic downturn. While mortgages come with their own affordability guidelines, considering a more cautious approach might be wise.
Sam Dogen from Financial Samurai recommends evaluating your home affordability using the 30/30/3 rule. He advises that no more than 30% of your gross income should go toward your monthly mortgage payment. Additionally, he suggests saving 30% of the home's value—20% for a down payment to avoid private mortgage insurance, and 10% as an emergency cushion. Dogen also recommends that the home's price be capped at three times your annual household income.
For instance, let’s assume your household earns $75,000 annually. This would mean your gross monthly income is $6,250, and according to Dogen’s rule, your monthly mortgage should not exceed $1,875. The home’s price should be limited to three times $75,000, or $225,000, and you should aim to save 30% of that amount—$67,500—before purchasing.
Although Dogen’s recommendations might seem challenging for many families, running these calculations could still prove useful. It's hard to predict future economic conditions or job stability, so spending less on a home could be a wise decision, particularly if you or your partner experience a loss in income.
