It’s heartbreaking to watch families lose their homes. The recession and jobs crisis shattered the “American Dream” for many. And let’s not forget about the unscrupulous mortgage brokers who duped many unsuspecting home buyers.
But many families simply bought more home than they could reasonably afford. It’s easy to understand why. We all overestimate how much money we actually take home after taxes and work related expenses. Add to it the fact that we’re prone to create overly optimistic budget scenarios and you see why we get in trouble.
Here’s where it pays to plan ahead before getting ourselves into hot water. When you evaluate any major purchase don’t be so quick to pull the trigger. Try the payments on for size. Take them out for a spin.
Let’s say you’re in the market for a new home. Test drive the house payments before you fall in love with that cute three bedroom bungalow situated on that shaded cul-de-sac.
Before you even contact a realtor, determine the type of loan rates you’ll qualify for and estimate the monthly mortgage for the type of home you’re looking to buy.
Next add 45% to your estimated mortgage costs (multiply your “mortgage” by 1.45). This is typically how much extra a homeowner can expect to pay to cover property taxes, insurance, utilities, and repairs.
Finally, you’ll want to open a new savings account. For the next four or five months, place the extra anticipated costs into the account. Don’t touch it. Make the extra payments to your savings account just as religiously as you’d make a new mortgage payment.
If, for instance, your current rent runs $1000 a month, but you anticipate a new mortgage and related home costs to set you back $1500, place the $500 difference into your savings account at the beginning of the month.
Can you live without? Are you struggling to live day to day? Is life miserable? Or perhaps, you can handle the additional expense with no problem at all.
Either way, you’ll find yourself in better shape. If the extra costs prove too much to handle, you’ve probably saved yourself from financial disaster later on down the road. And on the positive side, you’ll have accumulated a nice bit of cash in your savings account which you can use for an emergency fund or to pay down credit card debt.
And if you can handle the extra payments, you’ll have even more money to add to your down payment.
You can use the same tactic to determine if you’ll be able to comfortably afford a new car or any other major purchase. Test driving your payments now could save you a world of hurt later.
BMWK, how do you determine if you’ll be able to afford a major purchase?