It’s no secret that your home will be one of the biggest purchase decisions you’ll make in your lifetime. This holds especially true for custom houses, which are designed to be the home of your dreams. Before you start building your wishlist of desired features, however, it’s a good idea to determine how much you have to work with, budget-wise.
We’ve covered how to set a custom home budget before, but we haven’t addressed practical tips for actually calculating it. Let’s do that now.
1. Add Up Income and Expenses
First, add up all your revenue streams (for both you and your partner, if applicable). Look beyond your traditional income stream and include rental earnings, freelance, alimony… if there’s money coming in each month, include it. Next, add up your expenses, such as car payments, student loans and any other significant amounts going out each month. You’ll need both of these totals to determine your final budget.
2. Choose a Down Payment
Next, figure out how much money you’ll have for a deposit. You’ve probably already thought about this ahead of time, which makes this an easier step. Obviously, the down payment will have a significant effect on your monthly custom home expenses.
3. Research Tax and Insurance Amounts
The escrow part of the monthly payment is something you can’t ignore for your budget. Do some research on the real estate taxes in the area where you’d like to build your custom home, the interest rate you qualify for and your estimated yearly insurance amount. You might not be able to nail down specific numbers just yet, but at least get the rates if you can.
4. Pick Loan Terms and an Overall Budget
Now that you have your numbers, you can decide on an overall budget. The loan term will play a big role here, so it might be good to run a few different scenarios (30 years, 15 years, etc.) and determine the one that works best for you.
5. Follow the 28/36 Rule
Just because you can technically afford a certain amount doesn’t mean you should max out that amount, however. Take the overall budget you decided on in the previous step and consider lowering it a bit to make it more reasonable and protect yourself in case of future financial trouble. Consider following the “28/36 rule,” which states that you shouldn’t spend more on your house payment each month than either 28 percent of your gross monthly income or 36 percent of your total debt. There are several rules of thumb for budgeting your housing expenses and, frankly, we can endorse many of these rules as they apply to many different situations and budgets. We just encourage you to dream big, but be practical.
Want a clearer picture of your custom home budget? Contact us today to schedule a tour or consultation and we’ll go over your options.