Bottom Line Up Front
- Your mortgage payment includes 4 things: principal, interest, taxes and insurance.
- Creating a monthly budget builds strong financial habits and can help you see what you can afford for a mortgage.
- Consider other expenses like insurance, taxes, maintenance and unexpected expenses when building your home-buying budget.
In the market for your first house? Congratulations—it’s such an exciting milestone!
You’ve probably done some research on what it takes to buy a house and how to ensure a smooth mortgage experience. You may even have saved money to cover a down payment and closing costs. But, closing isn’t the finish line.
You’ll still have a few other costs to cover like maintenance, repairs or homeowner association (HOA) fees. So, how do you manage your housing budget like it’s a marathon and not a sprint? We’ve got some tips that may help.
Understand Your Monthly Mortgage Payment
Understanding what makes up a mortgage payment is another way to make sure you can buy a home you can afford. We get it—it’s easy to think that your monthly mortgage payment will be the price you agreed to pay divided by the number of months you’ll be paying on your loan. However, that’s not how it works. In fact, your monthly mortgage payment will be made up of 4 things:
- Principal: This amount goes directly toward your loan balance.
- Interest: In the beginning, a large chunk of your payment will go toward interest. Over time, that amount will decrease.
- Taxes: Your property’s location and value will determine how much you’ll pay in taxes.
- Insurance: Most lenders will require you to have homeowners insurance to cover potential damage or theft costs. If your down payment is less than 20%, you may also be required to pay for private mortgage insurance (PMI).
Your monthly payment could change somewhat over time, due to changing tax and insurance rates. If you have an adjustable-rate mortgage, you can expect your interest payment to change according to the latest market rate index.
Review Your Current Budget
Believe it or not, creating and sticking to a budget is a great way to boost your financial skills. Don’t have a monthly budget yet? Here’s how to build one:
- What’s your income? This includes not just your paychecks, but also any bonuses, investments, alimony or child support.
- What do you have to pay each month? Add up your regular monthly expenses. Be sure to include items like:
- food, clothing and transportation costs
- utilities (e.g., gas, electric, water)
- debts (e.g., credit cards, car payments, student loans)
- insurances (e.g., life, health, auto)
- internet and cable
- subscriptions and memberships (e.g., video streaming services, gym)
- savings contributions
- What’s left after you subtract your expenses from your income? Subtracting your expenses from your income tells you how much you can spend for housing. Most financial experts recommend spending no more than 28% of your income on a mortgage and related expenses, like the ones we explained above.
If your budget has more than enough to cover your estimated monthly housing costs, then you’re good to go! But, if not, there may be steps you can take to help you get there—like looking for expenses you could reduce or cut out. If you’re not sure how to set up your budget, you can use our interactive Monthly Budget Worksheet as a starting point.
Create a Sustainable Budget for Homeownership
Try these tips to stretch your budget farther:
- Don’t overstretch yourself. Almost everybody wants that perfect house with the short commute, nice neighborhood and lots of space. If you want to have a home you can afford, be willing to make a few compromises. Wondering how much house you can afford based on what you can pay each month? Use our mortgage calculator to get an idea.
- Estimate future costs. Having a rough idea of when you might need to repair or replace things in your home can help you prepare. For example, a roof usually lasts 20 to 30 years and carpets and appliances are usually good for about 8 to 10 years.
- Create a special savings fund for upkeep. Pricey repairs and maintenance costs don’t come up every month. But, you’ll be really glad you put money aside each month in a separate savings account when they do hit. It will be a great feeling to know you’ve got it covered and won’t have to scramble around at the last minute to find a way to pay for them.
- Reduce unnecessary expenses. Shift money from discretionary (optional) expenses to housing expenses. You can free up funds by making a few simple changes. For example, instead of paying for a gym membership, could you work out at home or outside? When you aren’t using electronics, could they be turned off and unplugged? If you need some furniture or clothes, do you try the secondhand route before buying new? Could you choose a less expensive internet, cable or streaming service? Can you ask for discounts?
Going the Extra Mile for You
Your mortgage partner should support you throughout the years. At Navy Federal Credit Union, we offer:
- VA loan expertise
- rate-locked mortgages
- several loan options that don’t require PMI
- best-in-class service throughout the life of your loan
Plus, our low rates and flexible terms may also help members who already have a mortgage lower their monthly payment. Explore all that our mortgages have to offer.