It usually goes something like this — you set a budget for buying a house, you find the home of your dreams, you put in an offer, and someone else bids higher. What do you do? When it comes to home shopping, you need to be ready for situations like this. And the question you need to be prepared to answer is whether you can really afford to overextend your budget when buying a home. If you’re not sure, read on to find out the pros and cons of buying over your budget.
When it’s Okay to Buy Over Your Budget
It’s not always a bad thing if you overextend your purchasing power – that is if you can afford it. If you’ve got investments, an emergency fund, and a solid stream of income to back you up, overextending your budget has its benefits. And for those who have the extra wiggle room because they’re selling their current home at a profit, pushing your budget can pay off in the long run. Consider a scenario where you’re set on paying $450,000, but you overextend your budget by $45,000 to win a bidding war. If the house appreciates in five years time and the home is then worth $550,000, you’ve just made $100,000 in equity, making your decision worth it in the end.
What Goes Up Must Come Down
While it’s true that the higher the purchase price, the more appreciation you will see over time, if the market drops 20% over the next couple of years you will lose much more than if you had purchased a home at a lower price. When you own a more expensive home, you stand to lose much more. So if you’re not positioned to weather a market correction, it’s best to stay within budget.
First Time Homeowners Beware
If you’re a first-time homeowner, it’s best to buy under budget. Why? Because the costs start to add up as soon as you move in. The down payment, mortgage payments, and closing fees are not the only amounts you need to cover. You also have to pay for the taxes, insurance, maintenance costs, and surprising fees like a broken water heater, all while juggling car payments and other life expenses. In reality, you won’t know what it will truly cost you to own your home until a few years down the road. That’s why first-time buyers who have little equity saved should stick to buying below their budget the first time around.
Three things you can’t rely on these days is good health, job security, and a pension. If you put all your money into a home and a tragedy happens, you’ll be sorry. Before overextending your budget to purchase a home, you should ask yourself “can we afford this if one of us loses our job?” and “can we handle all the expenses if a tragedy occurs?” If the answer is no, then it’s best to pass on the current offer and look for a house that is more within your means.
If you’re not sure whether you can afford to overextend your budget to get into a dream house, you should talk to a mortgage advisor At The Mortgage Advisors, we will carefully inspect your finances and help you make a decision that’s right for your lifestyle.