How Much Should I Pay for my Next Home?

October 06, 2016

No matter how experienced you are, buying a new home is always daunting. A main reason is the commitment involved. When taking out a mortgage, you are literally putting your home on the line because failure to make payments puts your home at risk. For that reason, it’s important to determine what you can realistically pay for your next home.

The 28/36 Rule

Most experts recommend following the 28/36 rule. The “28” in this rule refers to your housing expense, which includes your mortgage payment, home insurance, property taxes and any association fees related to your home. This expense should not exceed 28 percent of your gross income. The remainder of the 28/36 rule is your total payment for other debts such as credit cards and car loans. It should not exceed 36 percent of your gross income. The next thing you’ll need to calculate is how much money you have available for a down payment on your new home. A down payment of 20% of the purchase price or more is ideal. This will provide an equity buffer if home values should decline. It will also enable you to avoid purchasing private mortgage insurance, which is typically required when down payments of less than 20% are made. In most cases, the down payment will consist of the equity you have in your current home and your savings. However, you do not want to deplete your entire savings account to make your down payment. Keep an emergency reserve of at least a total of 3 months of your living expenses.

Once you have determined the maximum amount you should borrow and your down payment, add them together to determine what you should pay for your next home. We then recommend contacting an ENB Mortgage Expert to learn what type of loan program will work best for your family.