Creating a home building budget can be frustrating on many fronts. The most frustrating part is usually realizing how much things cost, and how little you have to spend. This article will help you to know exactly how much you can spend, and how to use that money to get what you want. In building a home one should think about what they want, not just how much they can afford.
What is Your Home Building Budget: Maximum Payments
Most lending institutions will not loan more money than you can possibly afford. Therefore they will not plan for you to make house payment equaling more than one third of your income. For example if you and your spouse make $6000 a month of combined income, your maximum monthly payment is $2000, provided you have no other credit payments. If you owe a $300 per month car payment, and combined credit card payments of $400 each month then you can only make house payments of $ 1300 per month. This is really very sensible for you and the bank as well. It is a good idea to pay off all your other debts before applying for a loan, and stop maintaining a balance on your credit card. Instead pay off cards each month.
While the lending institution knows how much they will lend, you absolutely are not required to borrow as much as possible. You know how much money you have at the end of each month, and if it isn’t one third of your income, then maybe you should consider only borrowing 20 or 25 percent of your income. Possibly though you could look at your personal budget and try to save more, just to see what happens.
It is important to save money for a down payment. You could be required to pay 20 or 30 percent of the total value of your future home, so start stashing back funds. A good idea is to attempt to save at least one third of your income each month, to see how difficult making payments will be.
Once you have determined your maximum payment, find a mortgage calculator on line. There is another variable involved in calculating a mortgage, and that is the interest rate. Current rates apply to people with good credit. That is another reason for cleaning up your credit before applying for a loan. While interest rates are low, bad credit could cost you a few points in interest. It is vitally important that you have savings, good credit, and no outstanding debt of any kind before applying for a loan. Fortunately there is a variable on some mortgage calculators for your credit score.
By using the mortgage calculator and some typical interest rates you can quickly see how much you can borrow on a 30 year mortgage, and how much you can borrow on a 15 year mortgage. 15 year mortgages can save you over $100,000 in future payments, so it pays to consider the 15 year option, even though it may reduce the amount you can borrow on your own income. Payments are a little higher per month for a 15 year loan, but the interest rate is usually lower, and there are only half as many payments to make.
A couple makes $6000 a month, and they have $100K in savings They determine that they would rather spend $1500 a month on payments even though they qualify for $2000.
If their credit score is excellent, they can borrow $210K for about $1,488 per month on a 15 year loan at 3.5 APR. They will need to make a down payment of 90K for a total budget of $300K.
After a brief discussion, the couple decides they do not want to spend $300K on a home. They calculated average cost per square foot, and don’t need that much space. They are interested in being green, and frugal, so approximately 3,000 square foot seems excessive. While keeping in mind that they could borrow more, they opt to consider building a home of around 1500-square-feet, knowing that they can get all the things they want in a home for less than they could afford. If they want to splurge on a hot tub, they can.
A couple makes only $2000 a month at the current time. This means the maximum amount they can make in monthly payments is $665, and they are doubtful that they can make that payment easily. Their credit score is 630 which is not great. They have inherited $50,000 recently though, and some acreage, so they have a down payment and a rural lot. By using the mortgage calculator they learn that they can get a 15 year loan for $70,000 at 4.179 APR. Their monthly payment would be $504, and their 30% down payment would be $30K. Their total budget is $100K. They could afford a 1100 square foot home, at $90 per square foot, or they could shop for a kit and pay about $60 per square foot. With a shell kit, put together by a local builder they were able to get a 1500 square foot home, and finish it themselves to their own tastes.
As you can see, home building budgets come in all shapes and sizes. Low interest rates, 15 year loans, smaller homes and even alternative building materials can save a lot of money. Your home building budget need not be either restrictive or excessive, and in the end it is your decision how much you are willing to spend for a home.