How much house can I afford?

Your monthly budget is so important. As I evaluate mine each month I look at the big rocks and think, how could I lower these? Sometimes thats easier said than done but I’m constantly thinking that I need to avoid big expenses. The biggest expense is nearly always your mortgage. The question is “how much house can you afford?”.

Right now those big expenses are my mortgage (including property tax & home owners), my grocery bill, day care for my children, my utilities collectively and something I call short term savings.

Understanding the big rocks

I think its very valuable to understand the big rocks that are in your budget. When I look at just those 5 big rocks they make up 66% of my monthly budget. Thats pretty crazy right? Here is a table showing my big 5.

Short term savings11.6%
Day care9.8%

Understanding what drives those and how I can best reduce them is so important.

how much house can I afford?

Understanding what I can control

When I look at my top 5 expenditures I could decide to drastically reduce those nearly anytime (outside of day care costs of course). Sometimes I like to look at it from the standpoint of “what could my budget be for a few months if I was jobless?”.

While I hope I never run into this situation its certainly something to explore.

If I were to lose my job I could immediately lower my grocery bill. Thats fairly straight forward. If we went over each week’s needs with a fine tooth comb I’m sure we could lower that bill.

I’ve went in depth on my short term savings account before. The big rocks that make this up are my life insurance and the two family vacations we take each year. By not going on vacations for a year we could cut that budget line alone by nearly 66%.

Unfortunately daycare kind of is what it is. While we wouldn’t technically need daycare we couldn’t break that relationship quickly or easily.

To a certain extent utilities are what the are.

The biggest rock, that is not easily moved is my mortgage costs. This is exactly why mortgages are so important. Not only are they what put a roof over our head but they are the biggest burden in our budget.

What makes a mortgage cost hard to move

When I think about lowering my mortgage I shutter a little bit. Not because I’d hate to downsize but the amount of work that would go into it. A mortgage is such a large transaction.

Its a large transaction in the form of costs and time.

Transactions costs on a mortgage are huge. You’ve got fee on top of fee. Not to mention moving costs. Any renovation costs, etc.

The time involved is also not easy. Not only do you have to wait 30-45 days to close but you also have to work with the bank to set everything up, you have to prepare your home for sale, etc, etc.

This is without even mentioning the time and pressure associated with actually finding the “perfect” home.

Why auto costs are similar but not the same

The other big rock that some people point to are auto costs. I’m fortunately not a car person so own one car and have a small loan on another. If you add up gas, loan payment and insurance it makes up 8.3% of my budget.

The big difference between a car and a house is the transaction costs, both in terms of time and cost, are not nearly as large.

If I had to sell both my cars in the next 48 hours to drum up some cash I’m sure I could do it.

Yes you could always be sitting on a loan that is higher than the cost of your car. That could get expensive. I just hope you aren’t in that situation.

If you have a mortgage that’s too big

This is a tough situation to be in. Maybe you lost your job or maybe you just overbought. Regardless its not a good situation.

The important thing to understand is how bad is the situation. Is your situation caused by a temporary problem? Maybe you lost your job. Maybe you got sick and have some medical expenses.

Is your situation caused by a long term problem? If so the best thing you can do is get out of your house. Its going to be a really big, painful band aid to pull off but you’ve got to do it.

It won’t be fun and you may have to swallow some pride. Just keep the vision for your life in mind. Think about 5, 10 or even 20 years in the future. Will downsizing your house be a good move for you? If yes, then you must do it.