How Much Home Can You Afford?

homeAll potential homebuyers must first ask themselves how much of a mortgage they can afford. Assuming you do not have large savings, the answer to this question almost entirely depends on your income. Using some simple formulas, it is quite easy to come up with a conservative figure of how much you can afford for your monthly mortgage payment. This article will show you two easy formulas you can use for this purpose. We will also provide links to some online calculators you can use to get more precise estimates.

Simple, Tried-and-True Formulas

There are two formulas we like for their simplicity and ability to quickly give you a good idea of what kind of home will be in your price range.

  1. Multiply your income by 3 to find the maximum amount you should borrow
    The first formula simply involves multiplying your annual income by three. This is the maximum amount you should borrow. Therefore, if your income is $40,000 a year, you should feel comfortable about taking out a mortgage of up to $120,000. Keep in mind that your salary is not necessarily the same as your income. When calculating your annual income, don’t forget to include things like rental or dividend income. After multiplying your income by three, simply add the amount you have for a down payment to arrive at the purchase price of the home you can afford.
  2. Keep monthly housing costs at 28% of monthly income or lower
    This formula is more accurate than the one above, and is actually the one used by most banks. To find out how high your total housing payment can be, simply calculate what 28% of your monthly income is. This is the amount you can afford to spend on monthly housing costs. Keep in mind that you should include real estate taxes and insurance along with your mortgage payment to come up with your total monthly housing cost. Using this formula, a person making $3000 a month would be able to spend up to $840 a month on housing.

Use Online Calculators to Get a More Exact Figure

While simplified formulas are great for getting quick idea of how much you can afford, many other factors such as how much debt you owe, your credit rating, and current interest rates will affect how much you will be able to borrow. For this reason, you should take advantage of the many online calculators available to get a more accurate estimate. In order to take advantage of such calculators, you will need to know three things first:

  1. Property Taxes
    The amount you pay in property taxes will depend on where you live, and how much you are planning to spend on your home. It’s fairly easy to find out property tax rates in your area by going to the tax foundation website. Many real estate sites will also include information about property taxes in their listings. 
  2. Insurance
    You will need homeowner’s insurance when you take out a mortgage. The cost of insurance should be less than what you pay for property taxes, and you should be able to get estimates online. You can also estimate your insurance by multiplying the cost of your home by 0.0035. The number you arrive at will be a good estimate of your annual premium.
  3. Interest Rates/Mortgage Rates
    To get current interest rates for mortgages, simply go to Bankrate.com. On the right hand side of the website, you should see the current average rates. This usually assumes you have good credit, so if your credit is not that great, you may need to adjust this rate upwards.

One you have these three pieces of information, try out any of the calculators below to get a fairly accurate estimate of how much house you can afford:

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