The most important step in buying a home is deciding whether you can afford to buy one at all, and if so, how expensive a home you can buy.
A lot of people don’t actually ask themselves this question at all. That’s part of why there are so many homeowners now facing foreclosure. Even though you may think buying a house is just part of what you’re supposed to do at a certain age, there really are plenty of other options including renting a house, renting an apartment, living in a mobile home, and so forth.
Even if you are among the few who can afford to buy a home, you will want to be careful that you’re choosing a home you can afford not only now, but in the future.
To figure out how much home you can afford, start by getting some figures together, like your gross annual income, the amount of money you can put down on a house, and your monthly debt (not counting your current rent, since that would go away if you bought a home).
The other figures which you’ll need to factor into your equations are annual property taxes, homeowner insurance bills, and of course, the cost of the mortgage itself. There are calculators online which you can find which will allow you to input some of these figures for yourself.
These calculators will then return you some numbers which they think you can afford based on the information you put in, including a house price, a loan amount, a monthly payment amount for your mortgage, and a monthly payment amount for your insurance. Some calculators may offer you a tax figure as well.
This should give you a starting point for your search for a mortgage (if you can afford one). Remember, though, that real life is a lot more complex than a calculator, and once you start finding candidates, you’ll need to do these calculations yourself, by hand, to find out whether you really can afford the homes you’re interested in purchasing. Another factor to take into account is the nature of interest. Interest rates which are fixed are predictable. Interest rates which are adjustable are not. Adjustable interest rates typically start out very low, and then are floated against an index after a set amount of time has gone by (usually several years). After this you’re at the mercy of the market, so if interest rates everywhere are high, yours will be too.
This is a big part of what has made so many homeowners unable to afford their homes anymore, despite having been able to in the past. Even though they can still afford to pay on the principal of the house, they can no longer afford the interest rate. Not only that, but other things go wrong in life—people lose jobs (especially in the recession) or have hours cut.
When you ask yourself how much home you can afford, ask yourself not only what you can afford now, but what you expect to be able to afford five years down the line, or ten, or twenty. You can’t truly predict the future, and it’s silly to base your whole life around what could go wrong, but if possible, try to have some contingency plans, and keep your situation as predictable as possible.
For example, an adjustable interest rate makes great sense if you’re only purchasing a home to live in for a couple of years and then plan to sell it and move on. But if you plan to stay in your home forever, it may be wiser to choose one you can afford at the current interest rate and then go with a fixed plan.
Only you can make these decisions—but one thing is for sure. You can’t afford not to calculate all these figures for yourself. So do the math and weight carefully what you want and need against what you can afford before you pick out a home.
You’ll be much happier in the long run if you aren’t struggling to make your payments in a few years, even if that means settling for a smaller home or a home in a different area than you may have previously desired.