Wednesday October 15, 2014
 

How Much of a Mortgage Can I Afford?

While there are a lot of great deals available on houses right now, it’s an intimidating time to be a home buyer.  Looking around, you see many other homeowners who are losing their homes—perhaps the house you’re looking into buying is up for a short sale or getting foreclosed on.

How do you make sure that doesn’t happen to you in a few years?

You’ll need to carefully calculate how much of a mortgage you can afford before you sign the paperwork.

To figure out how much of mortgage you can afford, you’ll need to consider your monthly income against your potential monthly debt.  Figuring out your income is easy enough; your debt on the other hand needs to include not only all your current bills and living expenses (minus your current rent), but also all the new bills which you’ll owe.

This isn’t just your mortgage—it’s also property taxes and mortgage insurance.  Your mortgage will also include an interest rate.  If this rate is fixed your calculations are easy—if the rate is adjustable, you can only calculate possible situations over the long term, not definite ones.

Don’t forget that a lot of your bills will survive the transition.  This means car payments, credit card debt, medical expenses, car insurance, and also basic living expenses like food, transportation, and household supplies.

By using an online calculator, you can get a general estimate for how much of a mortgage you may be able to afford.  These calculators do make a lot of assumptions and generalizations, though, which may or may not apply to you.  It can be a good starting point though, and from there you can begin to look at some houses which fall into that general price range.

Estimation isn’t enough with something this important.  If you do find yourself seriously considering a particular home, you should re-calculate everything by hand to find out whether you’d be in the red or the black or whether you’d break even with your finances if you bought a particular home.

Also consider whether you’d be getting a fixed or adjustable mortgage rate.  With a fixed rate you can calculate not only the short term but the long term (assuming your income and other bills remained fixed, which they won’t).  With an adjustable mortgage rate you can only calculate the near future with any certainty.  The long term remains an unknown.

Lots of homeowners who could afford their adjustable mortgages back in the beginning are now being foreclosed on because the interest rates rose so high.

You’ll never know with utter certainty whether you can truly afford a home in the long run—but you can at least figure out whether you can afford it now, and whether it’s feasible in future years.  You can certainly determine easily enough that some homes aren’t affordable to you.  These you can eliminate from your search.

For a lot of people buying a home at all is unrealistic; for you it may or may not be.  The only way to find out is to do the math, make some reasonable predictions, and hope for the best.


How Much Home Can I Afford?

There are lots of different homes including condominiums, mobile homes, and so on.  A home doesn’t have to be a house—it can take many other forms.

You may be able to afford a traditional house, but even if you can’t, it doesn’t mean that you can’t afford a home.  Besides, for some people other options are preferable anyway.  Your lifestyle and your budget should both play a role in your decision.

How much home you can afford depends on how much money you make every month and how much of that you spend. Mortgage Calculator

First you need to subtract taxes, insurance premiums, loan payments, and other unavoidable expenses from your income.  It’s not just recurring set payments you need to take out either.  Also take out recurring variable expenses like food and gasoline.

The remainder of your budget is what you’ll be able to put toward a home and utilities.  You can compare it against what you’re paying for your home and utilities now.

Do you have a lot of money to spare or only a little?

This should help you to understand what you may be able to afford in terms of a new home.

A home doesn’t have to be a standard detached single-family unit.  It might be a condominium which shares a wall with another place.  It could also be a house which you rent instead of buy.

This can be a more affordable option than buying since you don’t need to purchase homeowner’s insurance or pay property taxes on the dwelling.  A home can also be a mobile home or recreational vehicle.

A new one will be expensive and require you to take out a loan, but it again might be more affordable to you than a traditional house.  Many people (without families) these days are also building “microhouses,” which are very small dwellings (usually smaller even than most mobile homes) that fill all of a homeowner’s needs.

These are just a few of the many options for homes which are available and which don’t fit the traditional mold.  These options are becoming increasingly popular in a world where the traditional choices don’t always work out.

How much home you can afford varies by the type of home, and also varies by location.  You might find a condo downtown costs more money than a large country house in a rural area.

Depending on the lifestyle you lead, you might prefer the larger house in the country—or the smaller condo in town.  You could be surprised at which one costs more, however.  Lots of people assume the larger the home, the more expensive it will be.

On the contrary, there are many factors which influence the cost of a home, and size is only one of them.  You should also keep your eyes open for federal rebates on buying new homes in targeted rural areas or upgrading houses with energy efficient systems.

If you’re willing to think outside the box, you may be able to afford more than you think.

This is why the word "much" in “how much home can you afford” is slightly misleading.  Cost and value are two different things.

A higher cost home may have a lower value than a lower cost home in many cases.  This is a heartening fact, since it means you may be able to afford more home than you think in qualitative terms—even if your financial resources are limited. 

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