The internet is a treasure trove when it comes to finding information that can help you purchase your first home. Sorry looking for “How Much House Can I Afford?” mostly leads you to online calculators that use an algorithm to produce a generic estimate.
To get a number, these calculators will ask you for details such as your zip code, gross annual income, your down payment amount, your monthly debt, and your creditworthiness. From there, they will get an estimate of your Debt-Income Ratio (DTI), or the amount of bills and liabilities you have in relation to your monthly income.
The truth is that most lenders prefer a debt to income ratio of 43 percent or less, although some lenders may offer you a loan with a DTI slightly above that.
In any case, the numbers these calculators throw at you simply reflect what a bank is willing to lend you – not an estimate of what you are really doing can or should spend.
Let’s dig a little deeper into what factors to consider.
Factors That Should Affect Your Purchase Price
One of the most important factors to consider when deciding how much to spend on a home is how much to pay on your mortgage monthly. What kind of payment can you commit to without sacrificing other goals?
A mortgage payment calculator is a good tool in this case. A mortgage calculator can help you see what your monthly payment can be, depending on the amount you borrow, the interest rate you qualify for, and the length of the loan.
While deciding which monthly payment to live with, there are additional details to consider. The most important are:
- Deposit: If you can cut your home purchase price by 20%, then you can avoid private mortgage insurance (PMI). PMI adds an additional cost to your mortgage each month (usually around 1% of your loan amount), although you can remove that fee from your loan once you have at least 20% equity.
- Property taxes: Find the annual property taxes for each home you are considering and divide that amount by 12 to roughly figure out how much you will have to pay monthly for taxes in your mortgage payment. Also, keep in mind that your property taxes will likely increase slowly over time, increasing your monthly housing allowance payment along the way.
- Homeowner Insurance: Your homeowner’s insurance premiums will also vary based on property and other factors. Make sure you get a homeowner insurance quote so you know roughly how much you are paying for coverage each year.
- Home Guarantee: Do you want a home warranty that will repair or replace critical components of your property that are failing? When that happens, you want to price your home warranties that provide coverage for your HVAC system, plumbing, appliances, and more.
- Other monthly bills: Take into account other liabilities you have, especially the large ones. Daycare expenses, tuition fees, utility bills, car payments, and any other bills you have should be considered and planned.
- Financial goals: Are you trying to save more than usual so you can retire early? Or are you saving on a 529 plan for future college expenses? If your financial goals are priority (as they should be), make sure your new home payment doesn’t make saving up for other goals a challenge.
- Upgrades and repairs: Don’t forget to make an estimate of how much you might want to spend on repairs or modifications to your new home. A property that is new or ready to move into may not require much, but the money you plan to spend on a major renovation should be considered along with the purchase price of your home.
Hidden expenses to plan
The factors to consider when figuring out how much home to buy are obvious. But what about all the homeownership costs that you can’t always plan for? The reality is you become You will have to do some work on your home at some point, and many of the most popular repairs alone can cost tens of thousands of dollars.
These repair and renovation cost estimates from Remodeling Magazine’s 2020 Cost-Value Study are just a few examples:
- Garage door replacement: $ 3,695
- Vinyl Siding Replacement: $ 14,459
- Wooden Windows Replacement: $ 21,495
- Asphalt roof replacement: $ 24,700
In addition to major repairs like these, you’ll also have repair bills for your HVAC system, mulch for your flower beds, and ongoing maintenance and repair costs. You can also decide to remodel your older kitchen someday or add an extra bedroom as your family grows.
When figuring out how much to spend on a home, keep in mind that you don’t know exactly how much to spend on home repairs or upgrades. Most people put some money aside for home maintenance in their emergency fund, but you can also set aside money for home repairs in a separate high-yield savings account.
How to calculate how much you house Should Afford
All of the costs outlined above probably seem overwhelming, but keep in mind that most major home repairs will be spread out over the years and even decades that you own your home. Plus, hopefully you’ll earn more as your career progresses. As your paycheck grows, you can set aside more cash for emergencies and possibly even pay off your mortgage faster.
So how do you calculate how much house you can afford? That’s entirely up to you, but I’d first add up every bills you have to pay each month, including car payments, insurance, utilities, student loans, and other debts that you have. From there, add some savings so that you have cash to spend on your investment and savings goals. Also take into account the money you have reserved in a job account for retirement.
At this point, you could consider other factors that could affect how much you want to pay for a home. For example:
- Do you need to set up an emergency fund?
- Are children on the agenda and should you play for the cost of daycare?
- Do you want to save more money for a rainy day?
- Would you like a spouse to stay home in the future?
- How long do you want to repay your home loan?
Once you have all of the other factors into account, you can decide that you should put money aside for other goals, such as future daycare bills or college savings. You might choose to double pay your student loan so you can repay them early, or you might want a 15 year home loan with a higher monthly payment instead of a traditional 30 year loan.
In either case, experts agree that your mortgage payment shouldn’t be more than 25% of your income. With a monthly income of $ 7,000, this means your payment shouldn’t exceed $ 1,750. If your income is $ 5,000 per month, your monthly payment shouldn’t be more than $ 1,250 per month. These are baseball estimates, and your property taxes and homeowner insurance premiums (or estimates) should also be included in this amount.
What to do if you’ve already spent too much
If you’ve already spent too much on your home, you are probably wondering what steps to take next. Maybe your monthly mortgage payment is making it impossible to keep up with other bills, or maybe the home you bought was a lot more work than you thought.
Either way, if you bite off more than you can chew, there are some steps you can take to get back on track financially. Consider these options:
- Refinance your mortgage. With today’s incredibly low interest rates, almost anyone can refinance an existing mortgage and save money these days. If you can qualify for a new mortgage at a lower interest rate, you can lower your monthly payment and save money on interest each month. Compare mortgage refinancing rates here.
- Cut down on your expenses. Look for ways to cut your spending on a daily basis – at least until you figure out what to do in the long run. Find out which areas of your budget you may be spending more than you thought you would, such as: B. Go out to eat, take out or go out on the weekends. If you can lower your monthly expenses a little, you can find more money to pay off your mortgage every month.
- Get a roommate. Consider renting out your guest room to get help with your mortgage. If you live in a tourist area, you can also rent a space through platforms like Airbnb.com or VRBO.com.
- Sell your home and move. Finally, consider selling and moving your home when you have enough equity without incurring financial loss. Sometimes the best thing you can do in a financial crisis is to reduce your losses and move on.
The bottom line
How much house you can afford is not always the same as how much you can afford should afford. Only you know what your monthly bills and liabilities look like each month, and only you know the goals and dreams you should really be saving for.
When it comes to buying a home, you are almost always better off playing it safe and taking out fewer loans that a bank will borrow. Buying a humble home gives you a lot more options in life, but when you buy a home that you can’t really afford, you have years of problems.