How Much Home Can You Afford To Buy?

How much home can you afford to buy? Before you begin house hunting, this is the major question you need to ask yourself.

Now that we have looked at Fourteen Ways To Finance Your Home, let’s take a look at how much home you can afford to buy. You don’t get far into any discussion of homebuying before someone mentions a special, time-honored formula for determining how much of your salary you should budget for mortgage payments, Unfortunately, one person tells you the top amount is 25%, another says he or she heard it is 28%. Then, yet another says that it is the cost that matters, never spend more on a home that two and a half times your annual income.

Actually, in matters like this, every person should be their own expert. The question you need to ask yourself and answer is: How much money do I have left over to spend on shelter each month after meeting all other expenses? If you haven’t run up any credit-card bills, aren’t making car payments, and have few expensive habits, you could well afford to put 30%-35% of your monthly salary into a mortgage payment, or buy a home that costs three times what you earn.

What matters are the monthly payments, your mortgage payments and home-related bills (or the maintenance costs if you buy a condo).┬áTo get an idea of how much you can set aside for mortgage payments, total up right now, all other expenditures you’d expect to make in an average month, leaving out rent (or our present mortgage payment if you already own a home). Subtract that total from your monthly take-home pay. Then subtract an estimate for property taxes and insurance, The result, a fairly accurate idea of what you can afford to pay each month.

Example: Suppose you have $700 available for housing. Subtracting, say $160 a month for taxes and insurance leaves you with $540. If the prevailing mortgage rate is 12.5%, you can afford a mortgage in the $45,000-$50,000 range.

To that mortgage amount, add the total cash you can afford to put into a down payment. The result is the maximum price you can afford to pay for a home.

The downpayment you will need varies from lender to lender. It can be as little as 3% or as much as 30%-40%. The key element is your ability to make mortgage payments. If your salary and other income are high enough, you’ll be able to make a low down payment, Otherwise, the bigger your down payment, the lower the mortgage and, consequently, the lower your mortgage payments.

Next Move: After these calculations, you are now in a better position to make good use of the real estate classifieds in your area. You’ve seen for sale signs on properties that interest you, but without any clear picture in mind about what your budget permitted you to buy. Now you know what to look for as you begin the process of looking for your home.

Happy house hunting!

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