No matter how big or small your home is, your monthly mortgage payment is likely to be the biggest payment you make each month. When you’re building your own home, it’s tempting to feel like you should go ‘all in,’ saying yes to every little feature you want to include, but each of these extras adds to the cost of your home.
Especially when a larger home is best suited for your family, you’ll want to be extra conscious about total spendings. The best approach is to build a home that’s within your budget. These tips can help you afford the home you really want.
1. Calculate Your TDS Ratio
TDS stands for ‘total debt service,’ and it’s a calculation that banks use to determine how much mortgage they believe you can afford. You calculate this amount by totalling up all of your monthly debts, including housing payments and other debts like credit cards, student loans, car payments.
This amount should be less than 40 percent of your monthly income. To calculate your maximum monthly mortgage payment, the bank will total your non-housing related debts and subtract that amount from 40 percent of your monthly income.
To better understand this, let’s take a look at an example using round numbers. If you and your spouse have a combined monthly income of $10,000, the bank will want to ensure that your TDS is less than $4,000 per month.
If you pay $500 each month toward student loans, $300 toward a car loan, and have a credit card with a minimum monthly payment of $100, the bank will want to keep your mortgage payment at $3,100 or less.
2. Be Realistic About Your Family’s Budget
The monthly mortgage that your bank will approve isn’t necessarily the monthly payment that’s right for your family. For instance, it doesn’t factor in the cost of private school tuition or utility bills, among other expenses.
It’s important to look at your family’s budget and make a decision about how much you’re really able to pay monthly on a mortgage. Don’t forget that, when moving, some of your current monthly expenses might increase or decrease.
3. Make a Bigger Down Payment
Perhaps the best way to reduce your monthly mortgage cost is to increase the amount of money you use as a down payment. This allows you to take out a smaller loan. You may even be able to use your existing home equity for a down payment on a new home.
Understanding the down payment process involves crunching some numbers. For instance, if you had to take out a $500,000 loan to buy your house, your monthly payments might be around $3,300. However, if you were able to add an extra $50,000 to your down payment, the payment would drop to around $3,000.
A higher down payment may also mean that you won’t have to pay private mortgage insurance. This is an additional fee you have to pay when your down payment is less than 20 percent of the home’s value.
Putting ten percent down on a $600,000 home should result in total monthly payments of around $3,900. If you can afford to put 20 percent down on that same home, your monthly payment drops to around $3,200.
Clearly, having a big down payment can pay off. It may be worth waiting an extra year or two before buying your home. Use our mortgage calculator to see how different decisions can affect your monthly payment.
4. Make Trade-Offs
Remember that some upgrades require a lot of money for upkeep. That makes these features less desirable in the long run. For instance, many people want their home to be the hangout place for their kids’ friends.
Installing a pool practically guarantees that all the kids will want to come over in the summer. However, that pool can cost thousands of extra dollars each year. To save money, think about adding a fire pit instead. You can still be the ‘cool house’ and avoid breaking the bank when upgrading.
5. Get Rid of Your Debt
Getting rid of your debt is always a smart move, but it’s even more important when you’re thinking about buying a home. Higher mortgage payments look a lot more affordable when you’re not paying $1,000 a month toward other debts.
Paying off debts has an added benefit of increasing your credit score. This can decrease the interest rate you’ll pay on your mortgage, allowing you to save even more on monthly payments.
6. Choose the Right Home Design
You probably already know that a home’s size and the interior design choices you make play a big role in the total cost. What you might not realize is that there are actually a lot of architectural choices that can impact final price.
For instance, in homes with roughly equal square footage, a two-storey home will be less expensive than a bungalow. This is because the square footage on the second floor of a two-storey home doesn’t require additional foundation. You’ll also save money with a basic roof over one with extra elements like dormers or turrets.
Getting your dream home at a price you can afford is within your reach. You simply have to plan your purchase carefully and not be afraid to wait until the time is right.