How Much House Can I Afford?
- Last Updated: Tuesday, 23 February 2021
Maybe you have a new job, got married, or retired; perhaps the home is too small for a growing family, or too big for empty nesters. These are just a few of life's events that have people wondering: How much house can I afford?
Buying a new home or a first home is never easy. It's a complex legal agreement that usually involves a whole cast of supporting characters including:
- Real Estate Agents to help find a new home or sell an existing home.
- Attorneys to help navigate through the legal aspects of buying a home and aid in the closing process.
- Lenders or creditors that are going to help finance the purchase.
No doubt that each of these experts brings a great deal of value to the home buying process. But you're also the one paying each of these experts for their help. They're motivated to make the process go as smoothly as possible, which isn't always in a buyer's or seller's best interests.
These same experts get to walk away after the closing. You're the one that has to make the mortgage payment each month; so they need to be affordable.
Finding Affordable Homes
Everyone has a picture of their dream home in their mind; but the question that's usually left unanswered is this: Is that home affordable? Certainly lenders will gladly help to determine what you can afford. But in the early stages of the process, most of us just want to get a "feel" for what's doable, without commitments of any kind.
If that idea resonates with you, we have some good news. This website has an entire section dedicated to buying a new home; including a number of mortgage calculators designed just for this purpose.
- Maximum Mortgage Calculator: uses two of the industry standards, the rule of 28 and the rule of 32, to calculate the maximum mortgage at a given level of salary or household income.
- Mortgage Qualifier: uses assumptions including income, property taxes, down payment amounts, and purchase price of the home to determine if the buyer will qualify for a mortgage.
Every discussion of the home buying process should include a mention of closing fees; because they can be a substantial expense. Depending on the size of the home, property taxes, and points paid, if any, buyers can expect to pay between $5,000 and $20,000 at a close.
Individuals looking for additional information on this topic can find help in the following guides:
- Closing on a Home: talks about the legal aspects of closing on a home, including the more important legal documents a buyer will be asked to sign at a closing.
- Closing Costs Explained: discusses the major cost drivers encountered at a closing. A good article for anyone thinking about down payments, PMI, and how much money they'll have left after buying a home.
When trying to figure out how much you can afford to spend on a home, think beyond the mortgage and closing costs. Evaluate your total financial needs, especially some of the larger ones such as:
- How much is it going to cost me to make some of the annual repairs a home needs? Experts say this can be anywhere from 5 to 10% of the home's value each year.
- How much is it going to cost me to furnish the new home? A good rule of thumb is $3,000 to $5,000 per room.
- Will I need to make another substantial purchase in the near term such as buying a new car?
The affordability question goes beyond the home; it's really about one's long and short term financial outlook. Anyone that's not familiar with budgets, and how they can help people to make their financial commitments, should take a look at our article on household budget basics.
Finally, we're going to finish up with a bit of advice; make sure all decisions are informed ones. Think about the saying "house rich, cash poor" and the stress that goes along with struggling to make a mortgage payment each month. Play with the calculations, run through some "what if" scenarios; include extreme financial hardships such as what happens if someone in the household loses their job.
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