There are many methods regarding how to set a budget for a condo. One such method outlined by Dave Ramsey describes a 5-step process that makes sure you do not exhaust your finances when purchasing a condo.
Step 1: Aggregation of Monthly Income
Adding together your income and all others expecting to purchase a new condo, find the total aggregate monthly income. We advise that you use your post-tax income in calculating aggregate monthly income.
Earner 1: $2,500 per month
Earner 2: $3,500 per month
Aggregate Monthly Income (Earner 1 + Earner 2): $6,000
Step 2: Calculate Monthly Household Expenses
Identify and sum the total amount of monthly costs you and those intending to finance the condo. We recommend you divide annual expenses by 12 months and other expenses respectively. Make sure you ask the landlord what additional expenses will be associated with the condo such as parking, furnishments, gym, etc. Condos are different from apartments because they are sold by individuals not corporations. Thus, the amenities provided by the condo can vary by seller.
Step 3: Calculate the Cost of Owning a Condo
According to the Dave Ramsey model, your condo’s housing payment, including property taxes and insurance, should be no more than 25% of your take-home income (Monthly Income – Monthly Expenses).
There are many different types of mortgages. To maximize savings, many buyers obtain 15-year, fixed rate mortgages in order to maximize savings. However, other mortgage plans, like a 30-year, fixed rate mortgage, allows for lower monthly payments, but a larger total amount paid to the lender. Since financing is incredibly circumstantial, researching methods of payment is useful in determining the best financing plan for you.
Step 4: Prepare for the Unexpected
Although buying a condo demands attention to your current finances and financial plan, it is always a good idea to think about unpredictable circumstances, or even predictable ones. For example, having kids, buying a new car, and spending money on vacations are all expenses you may not consider now, but could eventually affect your mortgage-paying behavior.
Setting aside a considerable amount of money in case of emergencies or unexpected events can help to keep a roof over your head when you may need it most.
Step 5: Fine-Tune Your Plan
Given the amount you are willing to put away as reserves for the unexpected, calculate your new plan and find a monthly payment that makes sense given your expenses. Remember the golden rule – keep your mortgage under 25% of your monthly income and keep in mind your future self and unexpected curve-balls life may throw at you.
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