How Much House Can I Afford?
When you are ready to buy a house, the very
first question you are likely to ask is: “how much home can I afford?” The
answer to this question depends on a variety of factors, and you can use a home
affordability calculator to get a ballpark figure and get a feel for what range
of houses you should be looking at.
How Expensive of a House Can I Afford? —
When you are wondering “how much can I afford
to spend on a house,” the bottom line is what size of home loan you can qualify
to borrow. There are several variables from your personal financial history
that will factor into the answer, including:
To those existing factors, you can add some
variables of the housing market, and your own choices as you plan to assume a
mortgage term (fifteen years,thirty years, etc.)
current interest rate
mortgage insurance (if your proposed down payment is an amount less than
twenty percent of the price)
The current real estate market where you live
You can plug the relevant numbers into an
online “how much house can I afford” calculator, and the calculator should give
you an approximate answer for the amount of loan you should be able to take out.
How Much House Can I Afford?—A Firm Answer
Another approach is to go to your bank and
request pre-approval for a loan. The online calculator will give you a ballpark
figure that should be a fairly accurate estimate of your range, but with a
pre-approved loan in hand you will know exactly how high you can go in your
Your bank will take all the same factors into
consideration, but instead of a guess you will have a firm number in hand when
you begin to look at homes. You won’t be in for any unpleasant surprise when
you come to the table with an offer and then discover that your bank can’t back
you as far as you had expected.
Having a pre-approved loan also facilitates
your ability to move quickly on a house when you do find the right one. Time
can be of the essence—especially if you have competition for the purchase of
the home you have your eye on. Very often, the buyer who first brings money to
the table is the buyer who actually walks away with the title. With your loan
pre-approved, you won’t have any hold ups in the process, because you won’t
have to be waiting to hear back from the bank.
Can I Buy a House? Should I Buy a
Your new home should be entirely a blessing
for you, and you don’t want your payments or financial obligation to start
feeling like a curse instead. With that in mind, the next question to ask—after
“can I afford a house?”—is how much house you should buy. If the online
calculator gives you a range, or the bank has pre-approved you for a maximum
amount, remember that the top amount is just that: a maximum. It’s the most you
can reasonably afford to take on, given the constraints and details of your
income and debt and so forth.
There is something to be said for the idea of
not maxing out your credit possibilities. If you look at houses that are priced
somewhere below your maximum, you leave yourself open for several
possibilities. For one, you will have some room to bid if you end up competing
with another buyer for the house. As another alternative, you will be able to
include costs of remodeling or upgrades to your loan, if the house could use
some work in order to fully transform into your dream home.
Perhaps more importantly, however, you have
the option of not putting yourself at the limits of your financial resources if
you choose a house with a price lower than your maximum. You will have an
easier time making your payments, or (better yet!) you will be able to pay
extra on the principle and save yourself money by paying off the loan early.
Along the same lines of thinking, you might
consider holding off entirely on buying the house right away. The more of a
down payment you can bring to the table, the smaller the loan you will have to
be paying interest on. In the long run, the largest portion of the price you pay
for a house is typically the interest on the loan. In the case of a thirty-year
mortgage (depending, of course, on the interest rate) the loan’s interest can
add up to three or four times the listed price of the house. For the first ten
years of a thirty year mortgage, you could be paying almost solely on the
interest and hardly making a dent in the principle on your loan.
That’s why it can make a significant
difference if you make even small extra payments toward the principle, or start
with a bigger down payment (which of course translates into a smaller loan). On
the same principle, if you can afford a fifteen year mortgage rather than a
thirty year mortgage, your monthly payments will be higher, but your overall
cost will be drastically lower because you won’t be paying nearly so much
If the fifteen year mortgage puts you
uncomfortably close to your maximum—meaning you won’t have any room in your
budget for emergencies or extras—you could always lock into a thirty year
mortgage while making a commitment to yourself to make payments the size of the
fifteen-year plan unless there’s a financial emergency. Not everyone has the
self-discipline to follow through with that sort of plan, but if you do, it’s a
Whatever the terms of the mortgage you sign,
make sure of one thing. Make sure that there is no penalty for paying off the
loan early, because extra payment is the one sure-fire way to save yourself a
lot of money on your home.
How Much House Can I Afford With My
Salary?—And Is Salary a Sure Thing?
An uncomfortable but important question to
ask yourself is whether you are certain to keep the salary you are currently
making. If you’re making great money when you fill out your loan application,
but get downsized or laid off down the road, you could be in serious danger of
losing your home if you can’t keep up the payments.
This is an especially important question to
ask if you are single, or if your family depends on a single income. That’s a
classic case of having “all your eggs in one basket,” so it is worth your time
to consider in advance what contingency plans you have in place if anything
were to happen to that single income.
To ensure the security of your home, you
might consider some or all of the following measures, and incorporate their
cost into the overall cost of your mortgage and home ownership:
life insurance policy on the income earner, sufficient to ensure that the
mortgage could be paid off and the family could stay in the home in the
unfortunate event of losing the income earner.
insurance and unemployment insurance, sufficient to ensure that your
family could continue making house payments if the income earner were
injured or laid off.
savings for your family to live for several months (including mortgage
payments) if the income earner were laid off and needed time to find a new
Of course, these are all scenarios that you
hope to avoid (for more reasons than just keeping the house secure), but it is
worth taking the time now to think ahead, just in case. If any of these
eventualities were to come true, the last thing your family would need to be
worrying about—while dealing with that event—is the question of where they
could live after being evicted from the home.
These possible scenarios also add weight to
the idea of choosing a home that does not stretch your financial resources to
the maximum. If you purchase a home that maxes out your current ability to pay,
it would be that much harder to make ends meet if you found yourself, for any
reason, living on a lesser income in the future. A lower monthly payment, on
the other hand, could be an easier target to meet if you find yourself having
to do with less than your current level of income.
How Much House Can I Afford?—What Does That
When you have a number in hand—either from an
online calculator or from your actual bank—the next thing you will want to know
is what kind of house you can buy for that amount? This is a great question for
your realtor to answer, and one of many reasons to work with a realtor while
you are shopping for a home.
First, it’s important for you, as a home
buyer, to note that you don’t have to pay a realtor any fees up front, because
the realtors’ fees come from the sale of the house. In fact, it is technically the
seller who pays the realtors (although they have probably considered that
calculation when they set the price for the house in the first place). In most
cases, availing yourself of the services of a realtor will not only save you
some money, but also help you to find the house you really want.
It’s true that you can look up some of the
realty listings online for yourself, but a realtor has the inside track on all
the available properties, probably including some inside knowledge about how
long various properties have been on the market, how willing the sellers might
be to negotiate, and when a house is overpriced for the market. A realtor
working for you will be doing everything he or she can do to get you into the
home you really want, for the least money possible.
The realtor can help you find
the houses that are within your price range. The type of house you will be able
to buy will depend on a number of factors, perhaps location most of all.
Different neighborhoods within a town or city often have different price
ranges, and even the history of the house might make a difference. The length
of time a house has been on a market will also make a difference, particularly
if the seller has reason to need to get out from under it. Whatever your wish
list, your realtor will be able to find you the best match within your price
range, and answer happily the question of “how much house can I afford?