08/30/2010 If you're planning a home purchase, you'll work with three different budgets during three different parts of the process. Actually, that's misleading—you'll write one budget and stick to it, constantly evaluating and polishing it, but this budget will take on three different forms.
The first stage of your budget is the one you already know about. It's the one you write before you even start looking for a place to buy. What's your monthly income? How much of it can you put toward a mortgage payment? In general, you shouldn't plan to put more than 31% of your monthly pre-tax income toward your mortgage. The Home Affordable Modification program cites 31% as the maximum ideal debt-to-income ratio. In reality, though, your payment should be lower. Are you pursuing a loan with a low down payment, such as an FHA mortgage? Recognize that your monthly payments will be higher to account for this. Figure out what you can afford before you decide to buy.
Your budget takes on a second form as soon as you sign those mortgage loan documents. Hopefully you took the time to compare mortgage rates and snatched up the best deal you could find. Either way, you've just taken on a massive debt burden that will likely cost you hundreds of thousands of dollars in interest alone before you're free. But don't worry. You can cut out a lot of that cost by creating your second budget—a budget that includes additional annual mortgage payments and an early repayment date. You know the drill. • Add an additional $100 to your payment each month. • Make an extra payment each year. • Reroute your tax refund directly to your mortgage. • Make payments biweekly. • Do all this as early in the loan term as possible. You can carve years off your mortgage with simple techniques like this. But you need to plan for these additional expenses, and this plan is your budget's second form.
The third budget is one you might never use. You've got your mortgage figured out. You're paying it off early and saving money. What else do you need? Probably nothing. But keep your eyes open. You might see an opportunity for a mortgage refinance that could save you even more money. Don't be obsessive, of course—you don't need to lose sleep poring over Good Faith Estimates—but stay informed. Compare mortgage rates in your area. Check out what other lenders are offering. If you find a deal, rework your budget around it. See how it plays out. This is your budget's third and final form, and it's one that never goes away.
It's not enough to create a budget, take out a mortgage, automate your payments, and forget about the whole thing. Your budget—whatever its current state—is a living thing. Stick with it and stay alert. You stand to save a lot.
