Once you decide that you’re in the market for a house, one of the first questions you’ll need to ask yourself is how much house you can afford to buy based on your current and probable future income.
Built into this question is also whether you can afford to buy a house at all (qualifying calculator) if the answer is no, that’s no reason to get too distraught—these days not a lot of people can.
How much house you can afford isn’t just a quantitative question, either—it’s also a qualitative one. There are two ways to look at it. One is how much money you can afford to spend on a house.
The other is how much house you can actually get for the money you spend. Online calculators can help you to make this determination.
Before you sign any mortgage paperwork, you’ll need to know exactly what you can afford to spend on a house. To figure that out, you’ll need to figure out your monthly income vs. your monthly expenses.
Gathering the numbers will be your job—you’ll need to know exactly how much money you make each month (after taxes), as well as all of your monthly expenses. That includes expenses which lenders are interested in and expenses lenders don’t care about.
There are mortgage calculators and debt-to-income calculators which can help you to find out how much house you can afford based on this information. These calculators usually make a lot of assumptions about the mortgage you’ll be paying.
Some of the generalizations made by the calculators may not apply to you, and may therefore provide you with inaccurate information.
Calculators can offer you a great starting point to your calculations, however, and if you’re feeling overwhelmed and have no idea where to begin, or simply want a general idea of what you’ll be able to afford, this is a good way to get going.
Online calculators can tell you whether you can afford to buy a house at all. If you can, you’ll get an idea of what price range to look at.
While a calculator can get you going on the right track, you can’t rely on it for the entire process. A calculator can only provide you with an estimate.
Only you can find out whether that estimate is truly accurate or not. That means at some point along the line you’re going to have to sit down and calculate everything yourself by hand. This is the only way you can figure out what the flow of money will be like each month if you purchase a particular house.
Also keep in mind that if you choose to get a mortgage with a variable interest rate, you are forced to rely on estimates.
You can calculate your expenses at your initial (locked) interest rate—but you can only guess at your debt-to-income ratio after the interest rate is permitted to float against the housing market. Once this happens you may or may not be able to afford the house.
Many homeowners who were pulled in by low initial rates discovered years later that their variable interest rates had skyrocketed out of their budget and that their houses were no longer affordable to them.
A variable interest rate is a gamble unless you plan to sell your house again within just a few years of purchasing it. For itinerant people (military branch members for example) this can actually be sensible.
For a long-term home buyer it may be more sensible to go with a more predictable stable interest rate.