How Much Should I Spend on My First House?
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One of the hard realizations about buying your first home is that it will be just that — your first home — and you’ll probably move within five years.
So falling in love with a starter home and paying more than you can afford while expecting everything about your new home to be perfect shouldn’t be part of how you start the homebuying process.
You’re probably going to move eventually, though staying in your first home for at least three to five years is ideal for breaking even on your mortgage loan. There are a lot of costs to buying a home beyond the sale price, and it can take years for a home to gain value to justify selling.
In this article
How much should you spend?
Determining how much you should spend on your first house depends on your income and budget, and what’s right for one person may not be right for another. It’s an individual decision or, more likely, one made by a couple, and you shouldn’t let the loan amount you qualify for from mortgage lenders define your family budget for buying a new home.
In this story, we’ll go over the many expenses for homebuyers. They include the home price, down payment, closing costs, property taxes, your monthly mortgage payment, private mortgage insurance, title insurance, and housing expenses such as upkeep, among other things. We’ll list national numbers for these costs, which can vary widely by geography.
A home will likely be the biggest expense of your life. Plan for it like it is.
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How much can you afford?
Instead of asking how much you should spend on your first house, ask yourself how much you can afford.
A rule of thumb when buying a home is not to spend more than 33% of your gross monthly income. Mortgage lenders may only allow you to borrow up to a third of your income.
But you may have more monthly expenses than the typical family. These can include a few car loans, credit card debt, student loans, back taxes, personal loans, and funding an emergency account in case you lose your job in a recession.
A home affordability calculator can help, as can creating a family budget listing your expenses and income. An affordability calculator requires inputting such numbers as your yearly household income before taxes, monthly debts, down payment, loan term, interest rate, and credit score.
It will then show you the mortgage amount you’ll need to borrow to buy a home, and what the budget should be for your new home.
Calculate your debt-to-income ratio
When mortgage companies consider your debts, they only consider your monthly minimum payments on those debts. So if you have two car loans totaling $60,000 or a credit card balance of $9,000, they’ll look at your monthly auto loan payment of $250, and the $80 minimum payment due each month on your credit card.
This is part of your , and a DTI ratio under 36% is ideal for mortgage lenders.
Under the scenario above, $330 in minimum monthly payments on your car and credit card would be subtracted from the mortgage you qualify for. So instead of a monthly mortgage payment of $2,500, you’d qualify for a mortgage of $2,170.
But even that may be too high for your budget if you’re trying to pay more than the minimum due on your total debts each month so that you pay less interest on the debts.
What home price should you expect?
A home price is obviously the biggest cost of a home, so let’s start with how much first-time homebuyers can expect to pay the seller for the home.
The National Association of Realtors reported in May 2022 that for the first quarter of 2022, a typical starter home was valued at $313,000. With a 10% down payment of $31,300, the monthly mortgage payment was $1,363, a 30% increase from a year ago.
First-time homebuyers typically spent 28.4% of their family income on mortgage payments, which makes a home purchase unaffordable, NAR says.
A mortgage is considered unaffordable if the monthly payment of principal and interest adds up to more than 25% of the family’s income. While housing costs are burdensome if they take up more than 30% of income, the 25% share of mortgage payment to income considers additional expenses such as insurance, taxes and maintenance.
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The many costs of buying a home
The purchase price is just the start of what it costs to buy your first home. It’s the biggest cost, of course, and is largely based on what the buyer thinks the home’s value is in the current market.
Closing costs make up a large chunk of the other costs of a home purchase, as do parts of the buying process such as the down payment. Here are some of the many other costs of buying a home.
Down payment
The bank wants to make sure you have some skin in the game when buying a house. It won’t give you a loan for 100% of the purchase price, and asks for a down payment out of your pocket.
A 20% down payment is the norm for a conventional mortgage, but there are many types of mortgage loans that require 10% down or less. Government-backed loans often offer the best terms, with FHA loans requiring 3.5% down and VA loans not requiring a down payment at all.
An advantage of a 20% down payment is you won’t have to pay private mortgage insurance, or PMI. Premiums generally range from $30 to $70 per month for every $100,000 borrowed. Lenders require the insurance because a down payment of less than 20% is seen as a possible sign of not making mortgage payments, and they want to be insured against that.
Interest rate
The interest you pay on a home loan can almost be as much as the home price.
Lower interest rates usually increase the demand for property, which often causes home prices to rise. The opposite is true when interest rates drop. Lower interest rates make a home more affordable for borrowers.
Lenders will check your credit report for information such as your credit score and if you’ve had any late payments on credit cards and other bills. The higher your credit score, the more likely you are to qualify for a lower interest rate on the loan.
The interest rate you’re charged on your home loan affects the monthly mortgage payment, and is one of the biggest factors you can shop around for that influences how much you’ll pay for your new home. A home loan is for the price of the home being sold, of course, but there will likely be years of interest payments on top of that before you own the home outright.
Consider a $313,000 mortgage with 10% down, which NAR reported as the costs for a typical starter home. That leaves you with a loan of $281,700. The real estate agent group listed the typical monthly payment at $1,363, which equals an interest rate of 4.11% on a 30-year fixed rate loan.
As of mid-June, the national average for 30-year fixed loans was 5.54%, which would increase the payment on the above loan to $1,607. That’s an 18% jump in monthly payments for a loan that costs 1.43 percentage points higher. Waiting for lower interest rates, or buying now and refinancing later, can be worthwhile.
An amortization schedule calculator shows that for the average starter home loan of $281,700 with a monthly mortgage payment of $1,363, the total interest paid over the 30-year loan is about $73,000 less than amount borrowed after making the down payment. The total principal paid over 30 years is $281,700, and the total interest paid is $208,909.
Property taxes
Your local government collects property taxes, which are based on the assessed value of the home and your city’s tax rate.
Property taxes also vary by state. The average American household spends $2,71 on property taxes each year, according to the U.S. Census Bureau
Hawaii has the lowest property taxes, with an effective real-estate tax rate of 0.28%. Hawaii residents pay $1,874 in annual property taxes on the state median home value of $669,200.
Unlike a fixed-rate mortgage, property taxes rise as your home appreciates in value. The tax assessor’s office re-evaluates home values every few years, so your property taxes will likely go up. Falling home prices during a recession can cause the opposite effect.
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Insurance
Lenders require homeowners insurance as a way to protect their loan, and your investment, in case of a fire or other peril. The average cost of homeowners insurance is $1,899 annually in 2022, or around $158 per month.
Insurance premiums can fall if you have smoke detectors and other protection devices in your home, and some offer discounts for bundling car insurance.
Closing costs
We’ve discussed down payments and a few other closing costs, but here’s the nitty gritty of what closing costs entail. These are costs charged by your lender and related services to close a loan.
They usually add up to 2-5% of the loan amount. For a $300,000 mortgage, closing costs can range from $6,000 to $15,000.
Closing costs can include such mundane things as an appraisal fee, home inspection fee, HOA fee, loan application fee, loan origination fee, attorney fees, prepaid interest, mortgage broker fee, discount points, and special loan fees for an FHA or VA loan. Property taxes will also be collected in the closing costs, as will your first homeowners insurance premium.
Many lenders allow closing costs to be included in the loan. That’s great if you can’t afford them now, but remember you’ll be paying interest on them during the life of the loan.
The Closing Disclosure form required by federal law lists your loan's closing costs. It’s a five-page form that includes a table showing how much cash you’ll need at closing, minus seller credits, deposit and other credits that are often paid before closing.
Maintenance
Homeownership isn’t cheap. Whether you buy an old or new home, some repairs will be needed sooner or later.
How much you save for home maintenance may depend on the age of your home and how much work you plan to do on it. Just general maintenance and repairs for regular wear and tear can cost from 1% to 4% of your home’s value each year.
For a $300,000 home, that’s $3,000 to $12,000 per year, or putting aside $250 to $1,000 each month.
Pros and cons
Pros
- Buying your first home will likely make buying your next home easier. While first-time homebuyers typically spend 28% of their family income on mortgage payments, it drops to 18% of their income on a mortgage for their next home because appreciating home prices help them make a profit on their first home so they can afford a bigger down payment, according to the National Association of Realtors.
- If you’re a veteran or a member of the military, you should qualify for a VA loan, which doesn’t require a down payment.
- Figuring out your new home budget doesn’t require much math. Find an affordability calculator online and enter some basic figures to get an idea of what you can afford.
Cons
- After qualifying for a home loan and paying the closing costs, and then paying the monthly mortgage, don’t forget about the other costs of home ownership. They include property taxes, insurance, and repairs and maintenance.
- If your mortgage costs add up to 33% or more of your gross monthly income, and a lender is willing to give you a home loan, you may still not want to buy a home if all of the costs of home ownership are more than you can afford.
- Rising interest rates can make mortgages less affordable, but they can also increase the supply of homes if more buyers leave the market.
Why do millions of Americans trust LendingTree?
- 300+top-rated lenders
- $260Bin funded loans
- 111M Americans served
The bottom line
It’s hard to know if you’re ready to buy your first house. You might qualify for a home loan, but maybe your budget isn’t big enough to afford all of the extra costs that come with buying and owning a home.
We’ve gone over many of the costs of buying a home that go beyond the purchase price. There are taxes, maintenance, closing costs, and insurance to consider, among other things. A lender and your real estate agent can help you research those costs during the pre-approval process, but only you will know your true budget and what you can afford.
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Writer
Aaron Crowe is a freelance journalist who specializes in personal finance writing and editing. He has worked at newspapers, where he won a Pulitzer Prize, and has written for numerous online publications. These include AOL, US News & World Report, WiseBread, Bankrate, AARP, and many websites focusing on housing, credit and insurance. He lives in California with his wife and daughter.
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