Monday May 22, 2017

How Expensive of a House Can I Afford?

Thinking of moving out of your apartment and into a home of your own?

While the prospect of having your own house can be exciting, the realistic truth is that unless you have enough cash to buy your house out of pocket, it won’t really be your home until you’ve paid off your mortgage in full with interest, which can take decades.

With this in mind, you may be wondering how expensive of a house you can afford.  This may not be the best way of phrasing the question though.  What you really want to know is how nice a house you can afford!

Why make this distinction?

Hidden in the thought “How expensive of a house can I afford” is the assertion that a more expensive house is a better house.

In reality, this may not be the case at all.  Naturally it is in the interest of the banks and real estate agents to persuade you that this is the case, but depending on where you live and what your needs are, you might actually discover that a less expensive house is a better house.

For example, houses located in rural areas usually cost less, even if they are more luxurious.  Sometimes federal rebates are also available for homeowners who choose to buy in targeted rural areas. 

So when you’re shopping around for a house, don’t forget that there are ways you can pay less to receive more.  With that in mind, let’s return to the original question—how much can you afford to spend on a house—at the maximum?  Not that you necessarily want to spend the maximum! 

The key to figuring out what you can afford to spend on a house is your debt-to-income ratio.  This is the same ratio which potential lenders will look at when deciding whether you’re a viable investment or not.

You need to take a good long look at your finances and figure out how much is left over once you subtract your monthly expenses from your monthly income.  Don’t forget that you should calculate this based on your income as it stands after taxes.

Then you’ll want to subtract all your current debts and loans, your monthly expenses for travel and food, your insurance payments, and any other expenses you make every month.  You’ll want to also consider expenses which you can’t necessarily predict.  A little buffer in case of disaster (or in order to build up savings) is a good idea.

What’s left over when all is said and done will be the amount of money you can spend on not just a mortgage, but a mortgage and utilities and homeowner’s insurance and property tax and any other home-related expenses.

Many people forget to factor in all these associated costs and fees.  If you’re a first time home buyer, though, or if you can’t afford to put down much of a down payment on the house, you will be required to take out an insurance policy which will cost you hundreds of dollars each month. 

You shouldn’t necessarily be looking for the most expensive house you can afford within your current budget.  If you figure out you can indeed afford to buy a house, you should be looking for the best house you can afford within your budget—not the priciest house you can afford within your budget.

In an expensive urban area you might only be able to afford a small house, but in a less expensive rural area you might be able to afford a huge house—and pay less for it!  By being clever you may be able to save money and afford a better home. 

A lot of people think they can afford a more expensive home if they choose to go with a variable interest rate on their mortgage.

This may work if you only want to stay in your house for a few years (you can lock in a lower interest rate for those first few years), but once the interest rate floats against the market, it could go up or down.

If it goes down (or stays the same), you will still be in great shape, but don’t forget that if it goes up you may quickly find your house becoming more expensive than you can afford.

Think carefully over the situation before you decide to go with a variable interest rate!  You may not be able to afford it forever.  Good luck purchasing a great home within your budget!

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