What Price Home Can I Afford?
Before you start shopping for a home you need to ask yourself, "What Price Home Can I Afford?" To answer this question you will need to take a detailed look at your finances and build a budget. While building a budget is no one's idea of fun, you need to how much you can realistically afford to pay toward your mortgage each month to make sure that you don't overextend yourself. The reason many people get in over their heads financially when purchasing a home is that they fail to correctly estimate their total monthly expenses.
To start, add up all of your monthly expenses other than your current housing payment. When I say all of your monthly expenses I mean just that, all of your expenses. Besides the obvious biggies (loan payments, savings, groceries, and bills) you must also take into consideration all of those small expenses you don't even think about - transportation costs, eating out, grabbing a coffee, dry cleaning, poker night, impulse buying, collectibles, etc. As you can see, the small things really do add up. Therefore, to get a truly accurate estimate of your monthly expenses record every penny you spend for a week and base your spending on that.
Next, subtract your total monthly expenses (other than housing) from your monthly pay. This difference will give you a rough idea of the size of mortgage payment you can afford based on your current spending level. If this number is less than you would like it be, you need to decide what spending is necessary and what is not as important that you can cut back on.
The 28% Housing Income Method
Another method you can use to estimate how much of a monthly mortgage you can afford is by using a percentage of your total monthly income. As a general rule, no more than 28% of your total monthly gross income should be used to pay your mortgage - including insurance and taxes. So, for example, if your monthly gross income is $3,000, then 28 percent, or $840, would be your total housing expense. It should be noted that in some areas where real estate prices are higher than the national average, a larger percentage of income may be expected to go toward housing expenses.
The costs don't end there. Once you own the home, don't forget the expenses of ownership:
Mortgage payments
Property Taxes
Homeowners insurance
Private Mortgage Insurance or PMI (for some people)
Home Owners Association Fess (if applicable)
Furnishing/Decorating your home
Maintenance
Repairs
Upkeep
Remodeling
What Price Home Can I Afford?
After figuring out your budget, you can use one of the many home affordability calculators available online to help you determine what price mortgage you can afford. It is important to be aware that calculators do not take your entire financial situation into consideration. If you possess a lot of debt, for example, the actual monthly payment you can afford will likely be less than what the calculator proposes. Conversely, you will likely be able to afford a higher priced home than the calculator suggests if you are planning on putting down a large down payment. Although online mortgage calculators are helpful in estimating what size mortgage you can afford, they are obviously only tools to be used in the preliminary stages of the home buying process. To truly know what price home you can afford, you need to get pre-approved by a lender.
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