How a Financial Planner Thinks About Home Affordability

Eric Roberge
4 min readAug 15, 2023

My wife and I are currently selling the first home that we bought together. We’re also gearing up to buy our next place. This transition has led us to running through spreadsheets, net worth data, and other aspects of our financial reality to determine how much house we can afford in the future.

As a financial planner, here’s what I’ve considered in my own situation — and what I encourage others to consider if you also need to decide on a homebuying budget.

1. Think about how your down payment fits into your strategy

While you can put less than 20% down, I prefer this conventional down payment size because it lowers your monthly mortgage cost and avoids extra fees like PMI. Your ongoing expenses are a huge part of assessing overall home affordability.

Plus, putting more than 20% down may help lower your interest rate. The tradeoff is that you lock up more of your cash into an illiquid asset that may have a lower return over time than other available investments. The value of your home might not grow as quickly as a globally-diversified investment portfolio that can compound over time.

In our situation, we plan to use the net proceeds from our current home sale as the down payment for a future home. This increases the price point for affordability. We can put 30% or more down on a new home and lower ongoing costs.

We made the decision to put all the proceeds toward a new home because we’ve already addressed other major financial priorities.

We don’t have any other debts. We’re on track for big goals like retirement. And we already have savings strategies in place for other short-term goals that do not require cash from the home sale to achieve.

This may not be a good decision for everyone, especially if you have other debts or are behind on building up assets you can use to support your lifestyle in retirement.

2. Aim for no more than 20% of your income going to housing

Next, consider your monthly and yearly costs of ownership. The advice I give my financial planning clients — and that I follow myself — is to keep yearly housing costs to no more than 20% of gross annual income.

Include the following when determining annual cost of home ownership:

If you earn $250,000 in household income, by this metric, you should target $50,000 as your housing budget for the year. (This applies to renting, as well — you may only have your monthly rent to consider since you’re not responsible for taxes, homeowners insurance, and maintenance).

Keep in mind this metric is a guideline, not necessarily a hard-and-fast rule. We like 20% because it means you have plenty of room left in your cash flow for savings and everything else that’s important in your life.

People tend to go over whatever their stated budget is. By deliberately starting low and planning with more restrictive numbers, you give yourself buffer room.

If you max out on your planning and still try to reach for something more expensive, that puts a lot of pressure on your finances.

Targeting a 20% limit for housing makes it more likely that you actually land closer to something like 25% — still a reasonable number, if above the goal range.

3. Don’t rely on an adjustable rate mortgage

While adjustable-rate mortgages can make sense in some situations, my biggest concern with them is that they put a lot of uncontrollable risk onto your future finances.

You can’t assume you can always refinance, especially if you put very little down and therefore don’t have much equity in your home to start with. Plus, home values can drop, further reducing your equity.

I like to focus on what I can control within my financial plan. An adjustable-rate mortgage, by definition, leaves me with an interest rate that will change in a way that I can’t control. That’s why I prefer conventional 30-year fixed-rate options.

This also speaks to my general philosophy on planning assumptions at large: It’s not wise to build a plan where all your assumptions about what happens in the future are aggressively in your favor.

A “plan” that’s predicated on your income leaping, your expenses staying perfectly flat, your investments giving outsized returns, and factors entirely out of your control (like interest rates) swinging in your favor isn’t a plan at all. It’s a really nice daydream, but it’s not what you can make sound financial decisions on.

4. Be open to renting while interest rates are high

Like I said, we’re currently selling our house. And we do plan to buy a new home… eventually. But what we’re doing immediately after we close is renting first.

Part of this is because interest rates are so high, so we’re not in a rush to get a new mortgage with a rate that’s over double what our old home loan was.

Renting also allows us to test out the area we’re considering making our next purchase, without making a massive financial commitment.

We plan to use the next year or so to gather more information, assess our income potential to better understand how much house we can comfortably afford, and make a final decision on exactly where we want our next home to be.

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Eric Roberge

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