With most housing markets still favoring buyers and interest rates at near-historic lows, it’s a great time to consider buying a home. While the home buying process can be an exhilarating time, it’s also a process that requires ample work up-front to ensure you’re making wise decisions.
No more is this more apparent than when it’s time to decide how much house you can afford. Before you even step foot in one open house, you need to take time to do a thorough analysis of your financial situation so you're best prepared to decide on a home price that works best for your monthly income, how much debt you’re carrying, and any savings goals you’ve set for yourself.
The DIY Approach
In order to make an informed, unbiased decision about how much house you can comfortably purchase, you need to do some calculations yourself before you head out with a real estate agent or talk to a mortgage broker. One of the easiest ways to do this is to use a mortgage calculator. These calculators, similar to an auto loan calculator or a retirement projections calculator, are usually simple and straight-forward.
You’ll simply need to enter your numbers (income, debt payments, fixed expenses, etc), and you can quickly get a gauge for how much you’ll be able to spend on your new home without busting your budget. Remember to be brutally honest with your expenses—especially with discretionary and miscellaneous spending totals.
Pay Attention to Rates
Interest rates are always rising and falling. It’s important to stay on top of information that pertains to current mortgage rates—and to change your calculations in case there are any wild swings in a certain direction. In general, the basic rules you need to keep in mind is that the higher the interest rate, the more money you’ll pay over the length of the loan.
As long as you’ve done the calculations and are positive you can purchase a home for a certain price, you should move forward with your pre-approval so you can lock in a low interest rate for the entire time you’re searching for homes and closing on whichever house you decide to buy.
Mind the Numbers
A few general rules of thumb for figuring out how much house you can afford include keeping your total housing expense to less than 28% of your gross monthly income and your total debt payment to less than 35% of your monthly gross income.
If you’re nervous about taking on a mortgage, consider practicing what it would be like to pay that monthly payment. If you’re currently renting, pay your rent but put the remainder of the money in savings so as to keep “paying” the practice amount for a future mortgage.