Lesson #3: Set a Budget

Know thyself and know thy budget.  Unless you are part of the 1%, a 30 year mortgage commitment will be your future.  

Factors we considered:

• Cash up front:
• To know how much we needed to borrow, we figured out how much money to put into down payment which would reduce the amount borrowed.
• What could be the closing costs?  (our estimate was $8k)
• How much are inspections?
• When you find the house you love, what if it needs work or appliances to move in?

• Monthly payments:
• What are our current average monthly expenses?  
• What is our current average monthly income?
• How much savings do we have to put towards a down payment?
• How much can home owner's insurance be?
• Taking our income minus expenses, what is leftover to add to savings each month?  
• When can we go to Hawaii again?

You can also use any Home Budget Calculator like this one.  

If you provide a down payment that is less than 20%, then you will need to add a monthly private mortgage insurance (PMI) payment into your budget.  Our bank estimated $280/month (Rates can range from 0.5% to 6% of the principal of the loan).  

Because we planned on starting a family, it was better for us to put down 20% in order to have lower monthly payments.  

After Microsoft Excel crunched our numbers, we knew the amount of upfront cash and long term monthly payments that were affordable.  Sometimes, the seller can pay all or part of the closing costs but it's best not to budget that will happen.  

Buying a home can be an emotional rollar coaster.  Knowing your limits up front can prevent you from making an emotional budget decision in the future.  (The house we love needs a new foundation?  Sure!  We'll figure out the cost later...you only need one kidney, right?)