How to Figure Out How Much House You Can Afford?
This is a very common question people often ask. How much of a house can I afford? It’s an important one because it is easily one of the most important questions you can ask in terms of your budget. For many people, their housing costs are typically their highest cost.
Some people have said that you should pay no more than a 3rd of your gross income (before taxes) on housing. I do not think this is conservative enough. I say no more than ¼ or 25%.
For example, if your gross income is $6,000, you would not want to pay more than $1500 on your housing payment.
So now we have a payment that we are comfortable with making, but how do we now calculate how much of a mortgage loan to take out to pay for that house?
First, you want to make sure that you do your homework on the areas you are looking into, a realtor can help you with this, and make sure you have an idea of what a prospective house’s escrows would look like. This would be what the estimated monthly payment is for Homeowner’s Insurance and Property Taxes. If you are looking into a mortgage product that may require Private Mortgage Insurance then this is something that your mortgage loan officer will be able to calculate for you depending on several factors relating to the loan.
Let’s say you figure out that an estimated homeowner’s insurance is about $1,200 a year, that would mean that your monthly payment would be $100. And let’s say that you calculate property taxes to be about $1,600 which would make your monthly payment on taxes about $133.33, let’s round up to $135. You can ask your realtor to check the current property taxes from the tax record for this one or look at yourself on the subject property’s county website.
So now we take $100 + $135 and we get $235. This means that you can estimate approximately $235 of your mortgage payment to go towards your escrows leaving about $1,265 to go towards your principal and interest payment of your mortgage.
In the next part, we are going to need some help from a mortgage amortization calculator. I usually just do an internet search for “Mortgage Calculator”. Once there, you can input figures based on your situation. There is most likely going to be a box for interest rate, state, estimated credit score, how long of a term, and loan amount. After plugging in the required data, it will calculate an estimated monthly payment, which, unless you specify you want to calculate taxes and insurance, will only be principal and interest.
For example, for a $300,000 loan in Florida, with a 3% interest rate, 30-year fixed rate, and an estimated credit score of 780-799, your principal and interest payment would be $1,265.
This gives you an idea of how much of a loan you can take out based on your criteria as well as knowing that the monthly payment will be within your budget.
One thing that many people get confused about is the factors of a fixed-rate loan. Having a fixed-rate loan means that the principal and interest that are owed are fixed for the agreed-upon term. The taxes and insurance in your escrow account, however, are not fixed and can, and will, change. Taxes and insurance will rise steadily but they typically do not outpace the market which means that if you lock yourself into a low rate and stay in the home for a while you should be able to keep your payment low compared to people buying recently and renting.
I hope that helped clear up any issues you have had with calculating your mortgage and having it work with your budget. Thanks,
