How much rent can I afford? How much home does my budget allow? These are important financial questions to ask. When renting a place or buying a new home, you might have certain amenities, locations, square footage and aesthetics in mind — but one of the most important factors is price.
If your rent or mortgage payment is too high, you’ll be scrimping when it comes to food and entertainment, and you’ll hamper your ability to pay bills, save money or establish an adequate emergency fund. That’s why figuring out how much rent or mortgage you can really afford is so important. We’ve put together some tips for getting it right.
Renters: The 30 Percent Rule
How much of your income should go to rent? You could consider the 30 percent rule – seek out a place with a rental fee less than or equal to 30 percent of your monthly take-home pay. You could split higher rent with a roommate, as long as your portion fits the rule. Additionally, add up your monthly bills and expenses aside from rent — such as what you spend on groceries, fun, utilities, car payment, credit card bills, renters insurance, etc. — and make sure the remaining 70 percent covers the total amount while still leaving you money enough to save and keep yourself financially fit.
Of course, this rule has wiggle room. For example, if you live in a larger city, you can probably put a slightly higher percentage toward rent if you don’t have car expenses and can use public transportation.
If you’re a first-time renter, check out our newbie tips.
Buyers: How Much House Can You Afford?
If you’re in the market to buy a home (here’s how to decide), figuring out the sweet spot for a mortgage payment is a little trickier.
Keep in mind a mortgage payment will include more than just the principal and interest on your loan. You might have to pay private mortgage insurance (PMI) if you aren’t able to make a down payment of at least 20 percent. Depending on where and what type home you buy, you may be required to pay homeowners association (HOA) fees.
Your property tax fees are included in your mortgage payment as well. If you’re buying into a booming community or purchasing a fixer-upper (watch out for these money pits), be aware your property taxes may go up. Check to see when your area will have its next property tax assessment, and find out what to expect.
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Contact a Farm Bureau insurance agent for a quote and to determine which home and property insurance coverage is the best fit for your needs.