When you’re getting ready to buy a house, it’s a good idea to sit down with your calculator before you even start looking at houses. A house may be the largest investment you’ll ever make and you want to make sure that you don’t get in over your head. Here are some tips for determining how much house you’re ready to afford.
Determine Your Monthly Expenses
Most mortgage lenders will say that your monthly debt obligations (including your house) shouldn’t exceed 25 to 30 percent of your take-home pay. To calculate your monthly debt obligations, add the monthly payments for all your car loans, student loans, credit cards, and other loans.
You’ll also want to calculate your monthly budget for normal expenses. You want to make sure that you won’t need to cut out groceries so you can pay your mortgage.
There are a number of online calculators, but they may not take everything into consideration. They’re helpful with determining how much your mortgage payment might be, but they’re generally too generous on the amount of mortgage you can afford. Only you can determine that.
Factor In Your Down Payment
How much do you have to put down on your house? Twenty percent? Ten percent? Zero? Your down payment will influence your mortgage payment and the amount of interest you’ll pay. Anything less than 20 percent will require you to pay private mortgage insurance (PMI). This will increase your mortgage up to one percent of the total loan amount. On a $200,000 loan, this will amount to $2,000 per year. Over 30 years, that amounts to $60,000!
With this in mind, you may be better off putting your money in an investment account and letting it grow until you have 20 percent to put toward the house of your dreams.
Consider Future Expenses
If you’re wanting to add children to your family, you’ll need to account for the extra expenses that will bring. Estimates say that parents will spend around $250 to $300,000 on one child up to the age of 18. That will add about between $14 to $17,000 to your budget every year for each child!
You’ll also need to budget for home repairs, insurance, and property taxes. Once you own a home, there won’t be a landlord around to cover the repairs. You’ll be the one responsible to replace the leaking roof, the non-functioning toilet, the old garage door, and everything else.
Talk to a Mortgage Lender
A good mortgage lender can present you with a multitude of options to reduce your down payment and monthly payment. He might be able to introduce you to a grant, a mortgage credit, or a mortgage assistance program. You might be surprised at the difference these things make.
Home ownership is an exciting prospect. When you go into it knowing how much you can afford, you’ll be setting yourself up for a more stress-free life. Calculate your expenses (both current and future), determine your down payment, and talk to a professional lender before you start looking for your dream home.