Buying a home is one of the most important and powerful financial decisions you’ll make in your early adulthood. It’s going to be a source of equity and appreciation for you (like an investment), an ongoing monthly expense (like any recurring cost), and potentially even a source of revenue (if you’re renting to tenants).
Obviously, you’ll want to look at the subjective appeal of your house; for example, is it aesthetically pleasing and in your style? How does it make it feel? These factors can even affect its appraisal. But if you want your home to fit neatly into your long-term financial plan, you’ll need to crunch the numbers; the more objective your decision is, the more likely it’s going to be to pay off.
Calculations to Run
So what are the key calculations you’ll need to run to make your home purchase a likely success?
1. Projected Income
First, how much money are you going to be making in the next year? In the next 5 years? In the next 10? If you plan on staying at your current career, you can project your income to be relatively consistent. With that in mind, you’ll be able to use a calculator like this one from NerdWallet to figure out how much home you should be able to afford. Estimates on home affordability vary, but you should be directing roughly 25-30 percent of your income toward housing costs. Any more than that, and you’ll start stretching your budget too thin.
2. Mortgage Costs
Next, you’ll need to figure out exactly how much you’ll be paying on a mortgage—once you have a house in mind. There are many mortgage calculators out there, but On Q Financial has some of the best. If you have a ballpark on the home’s price and on the mortgage rate you can get, you’ll be able to calculate your monthly costs for the principal and interest, plus insurance and property taxes. Then, you’ll be able to compare that monthly cost to your income, and figure out whether your intended home fits within your budget.
3. Utility Costs
The monthly cost of a mortgage should be your number one priority, but don’t forget to check on utility costs in the area. Utilities are often charged at the same rate within a city, but if you’re moving somewhere new, or if you’re upgrading the size of your living space, you may be in for a rude awakening. The energy efficiency of the new home will also play a role in how much its energy bills are. Do some background research and see if you can obtain some old bills from previous homeowners so you can get a ballpark here.
4. Additional Living and Housing Expenses
You’ll also want to consider any other additional expenses you may incur while living in this house. For example, are you required to pay to be a part of the homeowner’s association (HOA)? This can be up to a few hundred dollars a month. Is your home old, and in need of some serious repairs? You’ll want to factor those in too. Additionally, you’ll want to set aside about one percent of a home’s value every year for ongoing maintenance.
5. Potential Appreciation
Potential appreciation is hard to calculate, but it’s worth investigating to determine what type of return you may see on your investment. Home prices, on average, slightly outpace inflation, but if you buy a home in a growing area with lots of new opportunities, you may see an even faster rate of growth. This shouldn’t be the basis for your decision, but it’s worth investigating. If you plan on making significant renovations or improvements, you’ll also want to factor in those values at this time.
6. Potential Rental Income
Finally, if you plan on renting your home to another tenant, you’ll want to figure out how much rental income you can get—and what ROI you’ll see. The calculator at Rental Property Reporter is handy for this. Even if you aren’t planning on renting your property now, it’s worth knowing this figure in case you move and rent the property in the future.
Faith in Numbers
While these calculations should be able to objectively tell you whether your investment will be a success, numbers shouldn’t be the only basis for your decision. As we mentioned in the introduction, you’ll obviously consider subjective factors about your purchase, including how it makes you feel, but in addition to that, you should consider the strength of your estimations. Your projections may or may not hold true, and your valuations may be off, throwing all of your numbers off in the process. Understand that lack of certainty when making your decision.
