Purchase of a home. It's a significant life milestone and brings up many emotions. (Excitement? Check. A tiny panic. Also, look! But do not fret. I want to demonstrate how our housing affordability calculator can assist you in determining how much to spend on a home.
Before you go in and begin shopping, I want you to be confident in the house size you can afford. Furthermore, our How Much Home Can I Afford? The calculator is capable of doing that. All you need to do to get an instant property price that fits your budget is enter your monthly salary into our home-buying calculator.
You only need to run a few numbers to determine how much house you can afford. So keep going if math isn't your thing. I'll take you step by step through the process. (I never misplaced a patient!). And for those married, ensure you and your partner review the outcomes together. You must be on the same page regarding your budget and what's practical given your financial condition. After all, once you have a common vision, shopping for your "home sweet home" will seem incredibly exciting and unifying.You can determine how much house you can afford using these five steps.
Use the 25% guideline to determine how much house you can afford: Never pay more than 25% of your gross monthly income (after taxes) towards your mortgage. By adhering to this rule, you can avoid overspending on real estate and becoming house poor. I want your house to bring you blessings rather than harm.
Say you make $5,000 every month (after taxes). Your monthly house payment should not exceed $1,250, following the 25% criterion I previously indicated. (It comprises principal, real estate taxes, HOA dues, etc.)If you stick to that amount, you'll have plenty of room in your budget to work on other financial objectives, such as retirement investment or college savings for your children.
Yes, you could do the math by multiplying the monthly principal balance by your interest rate, then dividing the home price by 180 months (a 15-year mortgage). But if you're anything like me, even reading that formula made you sweat. Use our helpful mortgage calculator to avoid the time and hassle of performing many calculations.
That sounds like a lot to remember, so let's look at an illustration. When you enter a $198,000 home's valuation, a 20% down payment, and a 5% interest rate into our mortgage calculator, you'll see that your maximum monthly payment of $1,250 increases to $1,506 when you include $182 for taxes and $71 for insurance. Therefore, you'll need to reduce the cost of the house you can afford to $163,000 to get that amount back down to a monthly housing budget of $1,250.
So, don't panic right now. You'll also need additional funds to make a down payment on a home. Also, there are closing costs to consider. Closing fees typically account for 3-4% of the cost of your house. Your lender and real estate agent will inform you in detail of the charges associated with the closing so you can prepare to pay them on the day of the transaction.
These expenses cover crucial elements of the home-buying process, including:
Remember to include closing fees in your total home-buying budget. For instance, multiplying $200,000 by 4% yields an anticipated closing cost of $8,000 when buying a $200,000 home. You'll need $48,000 in cash to buy your property when you add that sum to your 20% down payment ($40,000).
If you don't have the extra $8,000 for closing expenses, you should either wait to buy a house until you have the money or set your home price range a little lower.
Whatever you do, don't let closing expenses prevent you from putting down the most amount of money. You'll owe less on your mortgage the more down payment you make!
The truth is this: A home is expensive to own. Such costs can pile up between upkeep, upgrades, and repairs. Major house disasters are covered by your emergency fund, which should be 3-6 months' worth of expenses. Yet, whether you're a first-time homeowner or planning some home improvements, make room in your monthly budget to handle unforeseen costs. These expenses may comprise:
If you're used to paying $100–150 per month for utilities as an apartment renter, you may need to increase your budget to $400 per month once you become a homeowner.
Homeowners spend $3,200 annually on home improvement initiatives. It might apply to standard services like pest control, HVAC maintenance, and landscaping.
You'll need to account for minor home improvements in your budget because they can be very expensive. For instance, a little kitchen renovation can cost more than $26,000.
Note that your down payment greatly influences the amount of home you can afford. You won't need to borrow as much money if you put more down. As a result, your monthly mortgage payments will be cheaper, and your house loan will be paid off sooner. Just picture owning a house with no mortgage!
Today, I will continue to teach you why paying cash is the finest approach to purchasing a home. But if your schedule doesn't allow for saving money to pay cash, you'll undoubtedly need a mortgage. That's alright! Put aside 20% or more of the home's cost as a down payment. A 5–10% down payment is acceptable for first-time home buyers, but you'll still have to pay the annoying private mortgage insurance (PMI).
The annual cost of PMI is typically 1% of the loan's entire value. In addition to your monthly payment, there is another fee. It safeguards the mortgage company if you default on your payments and they are forced to seize the property (aka the dreaded foreclosure).
If your down payment is less than 20%, PMI may affect how much house you can buy, so consider that when doing your calculations. If that describes you, stick to a mortgage that is 15 years long and fixed at a rate that is no more than 25% of your monthly take-home pay. (The laws remain the same!) You can also lower your property price range for a 20% cash down payment.Spending more time saving for a sizable down payment is worthwhile. Otherwise, you'll be drowning in a crippling mortgage and shelling out thousands extra in fees and interest.
Let's now discuss the many forms of mortgages. Because they are created to allow you to purchase a home even if you cannot afford it, most of them (ARM, FHA, VA, USDA) are awful. So even though they seem alluring, keep your distance!
If you do the math, you'll discover that these mortgages cost you tens of thousands of dollars extra in interest and fees. It means that you will overpay for the loan by a significant amount.
Finding the ideal mortgage is crucial because of this. Finding a home, you love that fits your budget is easier when boundaries are set up front in the home-buying process.
The mortgage rules I provide are as follows:
Your interest rate won't fluctuate with this option for the loan. In addition, it safeguards you against an adjustable-rate loan's escalating rates.
A 15-year term will result in higher monthly payments, but you'll pay off your mortgage sooner and save tens of thousands of dollars in interest. Most likely, your mortgage lender will give you a larger loan than you can afford. Don't allow your lender to determine how much you can spend on a house.
Work with a real estate professional if you want more advice on purchasing a home you can afford. A qualified broker can help you set reasonable expectations while searching for a home in your price range and expose you to a home for sale but not informed other buyers.
The 28/36 rule states that you shouldn't spend more than 28% of your gross, or pre-tax, monthly income on home-related costs and no more than 36% on total debts, including your mortgage, credit cards, and other loans, like auto and student loans, is a good general guideline to use when determining how much house can I afford.
Salary determines eligibility for home loans. Typically, you can obtain a mortgage loan for 60 times your annual wage. Yet, while calculating the loan amount, lenders typically do not take your in-hand paycheck into the account.