Calculating exactly what you can comfortably afford to spend is a great first step to a successful homebuying experience.
Nothing causes greater stress and disappointment than chasing after homes that are out of reach. Start your search with an honest assessment of what you can comfortably afford to spend.
Keep Your Payments Affordable
Most lenders consider home payments to be affordable if the combined mortgage, property tax, and homeowner's insurance costs equal 28% or less of the owner's gross income. While this is a good starting point in calculating your affordability level, don't forget to contemplate other costs - utilities, commuting expenses, maintenance, etc.
Do You Have the Cash You'll Need?
Standard mortgage programs require a minimum down payment of 20% of the purchase price. While numerous alternative programs exist, many of these require the buyer to purchase private mortgage insurance
or carry higher interest rates - all of which can considerably increase the monthly payment. In addition to the down payment, the buyer can expect to spend 4-8% on closing costs. Don't forget moving expenses, decorating costs, and any necessary repairs.
Interest Rates Affect Affordability
Buying when interest rates are low can dramatically affect how much house you can afford. A buyer who can afford the payments on a $170,000 mortgage at 10% can manage a $200,000 loan at 8%. That's $30,000 of extra buying power for the same monthly payment.
Determine Your Own Comfort Level
While rules of thumb can be useful when determining affordability, each buyer really has to consider his or her own lifestyle and financial situation. Do you have large expenses in addition to your home? Will you want to purchase new furniture or do you have everything you need?
Will Your Employer Provide Assistance?
Companies often provide financial assistance to transferred employees. Some employers pay for moving and relocation costs. Others offer payments to help employees moving into areas with high real estate values. Any benefits of this type can help extend your affordable price range, so find out if your employer provides any assistance.
It's easy to assume that you can eliminate certain everyday expenses in order to justify spending more for a new home. It's quite another thing to have to live with this decision day to day. You may find yourself frustrated and unhappy down the road if you aren't completely honest with yourself at the start.