What’s a rule of thumb to determine how much mortgage you can afford? There’s no one rule, but these four tips will tell you.Home ownership should make you feel safe and secure, and that
4 Tips to Determine How Much Mortgage You Can Afford
What’s a rule of thumb to determine how much mortgage you can afford? There’s no one rule, but these four tips will tell you.
Home ownership should make you feel safe and secure, and that includes financially. Be sure you can afford your home by calculating how much of a mortgage you can safely fit into your budget.
#1 Prepare a Detailed Budget
The oldest rule of thumb says you can typically afford a home priced two to three time your gross income. So, if you earn $100,000, you can typically afford a home between $200,000 and $300,000.
But that’s not the best method because it doesn’t take into account your monthly expenses and debts. Those costs greatly influence how much you can afford. Prepare a family budget that tallies your ongoing monthly bills for everything – credit cards, car and student loans, lunch for work, day care, date night, vacations, and savings.
See what is left over to spend on home ownership costs, like your mortgage, property taxes, insurance, maintenance, utilities, and community association fees, if applicable.
#2 Factor in Your Down Payment
How much money do you have for a down payment? The higher your down payment, the lower your monthly payments will be. If you put down at least 20% of the home’s cost, you may not have to get private mortgage insurance, which protects the lender if you default. That leaves more money for your mortgage payment.
The lower your down payment, the higher the loan amount you’ll need to qualify for and the higher your monthly mortgage payment. But, if interest rates and/or home prices are rising and you wait to buy until you accumulate a bigger down payment, you many end up paying more for your home.
#3 Consider Your Overall Debt
Lenders generally follow the 43% rule. Your monthly mortgage payments covering your home loan principal, interest, taxes and insurance, plus all your other bills, like car loans, utilities, and credit cards, shouldn’t exceed 43% of your gross annual income.
Your gross annual income is $100,000.
Multiple $100,000 by 43% to get $43,000 in annual income.
Divide $43,000 by 12 months to convert the annual 43% limit into a monthly upper limit of $3,583.
All your monthly bills including your potential mortgage can’t go above $3,583 per month.
#4 Use Your Rent as a Mortgage Guide
Use a calculator that compares renting and owning to help you see what makes sense for you. If you are struggling to keep up with rent, buy a home that will give you the same payment rather than going up to a higher monthly amount. You’ll have additional costs for home ownership that your landlord now covers, like property taxes and repairs.
As a Realtor® & Certified New Construction Specialist, I assist consumers in the buying, selling, or leasing of properties in the Greater Austin area. ....
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