What can you afford?
The best way to determine what you can really afford to buy is to sit down with a reputable mortgage specialist and examine your qualifications and mortgage options. We’ll discuss this further in the next section, but let’s see how you can get a good idea by one of several simple methods.First, look at your gross annual income. If you multiply this figure by three you will get a rough idea about the maximum mortgage amount you’ll be able to qualify for. Example: If you have a combined household income of $50,000, you could possibly qualify for a $150,000 mortgage.
How much will a $150,000 mortgage cost you each month? It really depends on the rate of interest you can qualify for and the term of the loan. An easy, relatively safe calculation for an average thirty year mortgage is to assume a cost of $7.33 per thousand, i.e., 150 x $7.33 = $1,099.50. This would be the principal and interest for a $150,000 mortgage for thirty years at 8%. If rates are lower and you have good credit, you will likely be able to qualify for the lower rate, but this method gets you into the ballpark and gives you a little room for the tax and insurance escrows which will probably be part of your monthly payment.
Another way to figure out what you can afford is to sit down and work out an actual budget. Make a list of everything you spend money on, weekly, monthly, and annually (excluding rent). Convert the weekly expenses to annual figures (weekly total x 52), add this figure to your annual total and divide by 12. Add this result to your monthly expenses and you’ll know your average monthly expenses.
Next, figure out your net monthly income. Multiply this figure by .9 (you want to set aside 10% for savings), then deduct your average monthly expenses. The amount you have left is the total amount you have available to spend on your mortgage, property taxes, insurance, and whatever maintenance you’ll have to do. Divide this figure by $7.33 and you will have a rough idea about the maximum mortgage you can afford. Example: If you have $1,000 available, 1,000 / 7.33 = 136, so you’ll know you can afford a mortgage of approximately $136,000.
All of this being said, you still need to meet with a mortgage specialist to know exactly what you can qualify for. How much money you have for a down payment, how long the money has been in the bank, your length of employment at your current job, and many other variables will all have an effect on your borrowing power.
These exercises are helpful to give you a rough idea about the what you can afford and to increase your level of comfort with the idea of making a long term commitment to what will very likely be the most expensive purchase of your life. Please seek expert guidance, however, when you’re ready to get serious. Avoid falling in love with a house that you either can’t afford or qualify for. It’s best to know how much you can actually finance before you make your first appointment to look at Real Estate.