The idea of buying a home is quite exciting, imagining that you get to own the building that you live in plus the surrounding compound, But you have to ask yourself the question “How much house can I afford?”.
Owning a house is both an important commitment and a severe lifestyle choice. Buying a house is an important expense and a significant portion of the family budget. If your plan is to remain in your home for under ten decades, look at renting instead. Before you begin talking to lenders you should need to know “How much house can I afford?“. You can purchase a less costly house and take your surplus home equity and place it in your retirement portfolio.
- 1 Why you need a home affordability calculator?
- 2 This article entails a detailed list of factors considered in answering the question, how much house can I afford?
- 3 Conclusion
Why you need a home affordability calculator?
The process of the purchase of a house, however, does not share the same enthusiasm. For some homeowners, the idea is to prequalify for as much mortgage as they can get. To buy a big house, without the consideration of other underlying factors that may affect the payment process. They fail to ask themselves the fundamental question, “how much house can I afford?” And as a result, fail to utilize the home affordability calculator created with the purpose of answering this question.
Unlike a mortgage pre-qualifications and preapprovals which are simpler and entail the estimation of how much money you can borrow based on your monthly or annual income, a home affordability calculator involves more detail. The home affordability calculator consists of calculations of how much house you can afford based on; salary, savings, monthly debt responsibilities as well as closing costs such as insurance and local taxes generally known as the income-debt profile. When home buyers ignore the question, how much house can I afford? They risk their financial stability with the inability to cater for their basic financial obligations and may consequently face the much-dreaded term foreclosure.
This article entails a detailed list of factors considered in answering the question, how much house can I afford?
And help you as a potential homeowner get a reasonable home budget and avoid the kind that would break your bank account.
The general income used in the home affordability calculation is an accumulation of your gross annual income for most calculators. That is the total amount of money that you earn every year in terms of; wages, salaries, commissions or even tips before taxation. Your general income is the primary determinant of how much you can afford to pay per month. It also helps you determine the price range in which you should consider getting a house. Especially given that the price range of homes that you may be willing to buy within a particular location is a recognized factor in your home affordability calculation. Thus the general income is the most fundamental factor that helps you with, how much house can I afford?
For most people, their salaries are not meant to cater for mortgage payments solely. It is, therefore, worthwhile to consider monthly expenditure in this calculation. This aspect entails an approximate amount of what you would spend in a month on utility bills (such as subscriptions, insurance, credit cards, car loans) and other essential expenditure such as groceries. This inclusion will help you determine how much is left for you to use in making your monthly mortgage payments.
Therefore, if you need to be eligible for a bigger mortgage, pay off all your credit cards before applying.
How much down payment for a house?
Most mortgage loans require a down payment of at least 20% of the home’s price. It is also perceived that the more down payment, the bigger the house. But this idea does not cater for the monthly mortgage payments that you will be required to pay. With the home affordability calculator, however, both aspects (down payment and monthly mortgage payments) are considered. That calculator can, therefore, be used to estimate your home affordability and determine the monthly payments that you are legible to pay once you make the down payment. A better way to manipulate the down payment is by paying more to reduce the term and amount of your monthly mortgage payments.
which type of home loan is best?
The loan type is a critical consideration in the affordability calculation. There different types of loans which also determine different payments standards. The common two are the fixed-rate and the adjustable-rate loans. They both have their merits and demerits, and according to your financial capabilities, you should pick one that suits you. The fixed-rate is more consistent and predictable, adjustable-rates, on the other hand, start with lower interest rates. Using the affordability calculator helps you determine which will work best for you and help you answer, how much house can I afford?.
What house price range can I afford?
With consideration to your overall income, monthly expenses, your down payment, loan type and other financial factors the home affordability calculator helps you determine the homes within your price range in a location of your choice. With this estimation, you are easily able to figure out for yourself, how much house can I afford? Using the prices of homes within your price range.
The expense of a house is the single largest personal expense most individuals could face.
How much monthly mortgage payment can I afford?
The monthly mortgage payment is another very fundamental factor since it is what you will be paying every month for the rest of the loan term. When doing your calculation to answer, how much house can I afford? Other factors such as principals and interests, property taxes private mortgage insurance among other things are considered in making the estimation. The result lets you know how much home you can afford.
The 36% Rule
The 36% rule is one rule of thumb that most homeowners taking a mortgage loan are advised to follow. It stipulates that your total debt payments, that includes car loans, student loans and such should not add up to more than 36% of your total income before taxation. Although some lenders still offer loans to those whose debt ratio is past 36% (at a higher interest rate) it is advisable not to so as to avoid bad debt on your bank account. The 36% rule is significant in answering, how much house can I afford? Regarding debt-ratio.
There is a myriad of mortgage calculators on the internet for easy and quick access. They are, however, not as efficient as required in helping you with the question, how much house can I afford? Simply because their main and only aspect of consideration in making their calculation is your income ignoring all other financial obligations that affect it. Their assumption is that your salary is solely meant for your mortgage which is a risky assumption. You need to consider the major underlying factors that surround your finances including the most basic ones such as utility bills and food budget. The more the elements to include in the calculation the better for the home affordability calculator because that develops into the most accurate answer to the issue of, how much house can I afford?
Think about it.
The larger The down payment, the larger the house you can afford to purchase. The sooner your residence is repaid, the more freedom you have got in terms of having the ability to travel, explore other job opportunities further away, and to better take care of a lengthy family. Quite simply, don’t just purchase the largest possible amount of house you are eligible for.