Although the real estate market is on fire, most people are still able to afford home ownership, though prices and interest rates are climbing. The National Association of Home Builders published a report that stated if your household income is at least $68,000 per year, you can afford nearly 60 percent of the homes that are on the market. The report is put out quarterly and looks at interest rates, home prices and the median household income in 238 metropolitan markets and across the nation. It doesn’t look at down payments.
How Much Home Can I Afford?
You may be tempted to buy a home that is at the top-end of your budget. However, before you plunk that down payment on a house with higher mortgage payments, you have to take into consideration that things change over the years. What if you lose your job? What if something happens to your spouse? What if you have unforeseen medical bills? Anything can happen, so it’s better to keep your monthly payments low enough so that one wage earner is able to pay the mortgage, if possible.
And, when purchasing, don’t forget about the closing costs and the down payment to add to the budget. So, you not only have to plan for the actual purchase, but you also need to have a general plan in the event something does happen in the future if you want to keep your home through rough times.
How Much Mortgage Can I Afford?
The best way to figure how much mortgage you can afford – and then how much you actually want – is to look at several factors. First, you’ll need to create a detailed budget. The rule of thumb is that you can afford a home that costs up to three times what your gross earnings are. Thus, if your household earns $100,000 per year before taxes, you could afford a home that costs up to $300,000.
Your budget will tell you where in that spread of cost you should actually be since you have to figure in expenses and debts. If you have $1,000 in debt – car payments, loans, credit cards – the amount you are able to afford will be less than the same person with only $300 of the same types of debt.
The budget should show monthly totals for all loans, debt, daily spending such as lunches you buy, eating out, activities you regularly do, how much you put into savings during the month, your insurance and health care costs, and anything else you spend money for on a regular basis.
The leftover money is what you have to spend on utilities, home maintenance, property taxes, house insurance, mortgage and association fees.
Add in the down payment. The more money you put down on a home, the less your monthly mortgage payments will be. Enter the price of the property, the down payment amount and the interest rate in a mortgage calculator to get an estimate of a proposed mortgage payment – that will be principal and interest only. Don’t forget to add insurance and taxes to the monthly payment.
Debt to Income: What Percentage of Your Monthly Income Should Your Mortgage Payment Be
Banks look at several things before lending you money to purchase a home, including your debt to income ratio. Ask your bank what debt to income ratio it uses and what type of debt that includes. If your bank uses 43 percent of your gross income to cover the mortgage, taxes, insurance, and other loans and credit cards, any debt you have, plus the monthly payments cannot be over that percentage.
Sticking with the original gross amount of $100,000, you would multiply that amount by 43 percent. Divide 43 percent by 12 months for $3,583. This is what you need free every month to cover the mortgage, insurance, taxes and other debt. Some banks use 33 percent to cover just the mortgage amount, which would mean that your mortgage, taxes and insurance cannot be higher than $2,750 per month.
Contact On Point Carolinas Realty
For help in finding the perfect home at a price you can afford, contact a realtor in Mooresville NC – On Point Carolinas Realty.