Homeownership may seem like a wise alternative to renting, but it's not necessarily going to be cheaper -- at least in the short term. If you're like most people and need to take out a loan to buy a house, you'll have to make monthly mortgage payments. It's a common mistake to assume what you can or can't afford. Before you make this decision, take a good, hard look at your income and expenses to find out the truth about what you can comfortably afford to pay every month for the next 15 or 30 years.
The easiest way to do this is to make a budget. This entails listing all your income, including wage and investments as well as all of your expenses, from monthly payments to food and even hair cuts. To figure out how much you can afford per month on something like a mortgage, it's a good idea to measure your budget in what you make and spend in the time span of a month. But just a month of income and expenses will only be a snapshot of your financial picture. Also look at a few months of your financial activity to consider non-monthly expenses like vacations, wedding and birthday gifts.
After you've gathered this information, study it to discover some financial habits you may not have considered before. Am I spending too much on lattes? This may open your eyes to where you are wasting money. As a result, you may decide to save more before purchasing the house of your dreams. Of course, never underestimate the power of habit, and only make realistic expectations about yourself and your ability to cut down on certain expenses.
It may be helpful to include with your budget a list of what you need and want in a house -- from the number of bedrooms to the ideal location. Put these in the order of priority, so you have an organized list to use later on. This step, plus the analysis outlined in Mistake No. 8, will help you set a price range within your means.
Creating a budget may seem like a tiresome chore or even downright drudgery. But one way to make it fun is to treat it like a game or a mystery that you must solve to find out where your money disappears [source: Barlow].
Some people skip budgeting altogether and just use their current monthly rent payments as a gauge to determine how much they can afford on monthly mortgage payments. However, this could be misleading for a few reasons. First, this simplification would neglect the fact that part of your rent payment includes maintenance costs. Those things that are your landlord's responsibility now, like paying for the repair of a broken dishwasher, will be your financial responsibility when you own a house, and have nothing to do with your mortgage payments [source: Barlow]. Secondly, if you can afford to pay more, you should take the work to find out -- otherwise you may pass up your dream house because you don't realize you can afford it.
Also, when you're finding out what you can afford, keep in mind that emergency expenses pop up occasionally -- like a costly surgery for your family dog or the loss of your job.
Next, we'll talk about another little chore that could save you a lot of money and headache if you address it early.