When you are ready to buy a new home, the first thing you need to consider is how much of a mortgage payment can you really afford. It is important that you settle on a specific price window and stick with it. This will help you avoid falling into the trap of becoming overwhelmed with debt and possibly facing foreclosure in the future. Determining just how much house you can afford is fairly simple if you follow these basic tips.
This is part one of the basic 28/36 rule of home buying. All of your monthly housing costs, including mortgage, insurance, property tax, and any association fees, should never exceed 28% of your monthly gross income. An easy way to find this number is to take all of your monthly income from any source and multiply it by 0.28. This will give you a solid idea of what sort of housing costs you have to work with.
The second half of the 28/36 rule states that your total monthly debt payments should not exceed 36% of your gross monthly income. This includes housing costs, credit card bills, loan payments, and other monthly debt payments. To find how much monthly debt you can comfortable afford, multiply your total income by 0.36.
How much of a down payment you can afford will play a large role in determining how much you can pay for a house. Average down payments run between 3.5% and 5% of the home’s total cost, but the more down payment you can afford, the less your monthly mortgage costs will be. A larger down payment will also give you more wiggle room when it comes to deciding how much house you can afford.
If you don’t have a lot of cash on hand for a down payment, turning to your retirement accounts can be tempting. While this isn’t necessarily something you should avoid doing completely, it is something you should only do with caution. The first place you should always start is with a Roth IRA or Roth 401(k) plan. Because any contribution you make to Roth plans are taxed before they are made, you can withdraw from these accounts without paying penalties or additional taxes. You can borrow up to $10,000 for a home purchase from a traditional IRA, but will have to pay a 10% penalty for any withdrawals over that amount.
When considering the total costs of buying a new home, don’t forget to calculate the moving costs themselves. Renting a truck or hiring movers, purchasing any necessary new furniture or decorative items, and even the costs of packing supplies can all add up and should be budgeted in early on in the home buying process.
Looking for a quick and easy way to determine how much house you can afford? There are plenty of ways available on the Internet, including this comprehensive mortgage calculator.