Congratulations! You’ve accomplished the first step and now know how much house you can afford. Now that you’re soon to begin your housing search, how can you prepare for your new payment? One of our favorite financial planning techniques is to “pay yourself” the difference in your current payment and your new projected payment. Let’s take a look at an example:
– Current Housing Cost – $1,500/month
– Projected Housing Cost – $2,000/month
On the first of each month, add $500 on top of your mortgage payment. Instead of sending it in to the lender, have an automatic transfer of $500 to your savings account. After a few months, you’ll be able to start getting an idea of whether or not you’re comfortable with that extra $500 outflow each month. If it doesn’t impact your cash flow negatively, you know that you’re well prepared for a higher mortgage payment. If it does cause cash flow issues, then you may need to adjust other parts of the spending plan in order to afford your new projected mortgage. On top of getting comfortable with the extra expense, you’re saving up a down payment as well.