How Much Home Can You Afford?

With demand dropping in the real estate market, now is the perfect time to get a great deal on a home, especially if you are considering stepping up into a bigger, more luxurious home.

Deciding How Much is Too Much

My advice is, if you are looking for a new home, take some time to calculate just how much you can afford to spend. Chances are you have already searched on the Internet. You may have checked out some of the mortgage calculators and tried to figure out how much you can spend monthly before the “ouch” factor raises its head.

Unfortunately those kind of calculators do not really consider all the critical information necessary to make a decision. And many of the calculators base their recommendations on outdated criteria. For example, the old standard for mortgage planning was that total amount of monthly mortgage payment (including taxes and insurance) be 30 percent of your total gross monthly earnings.

Times Have Changed

When this standard was developed, a mortgage was the primary debt for consumers. Nowadays, mortgages are rarely the only debt consumers carry. Most of us have credit card debt, car payments, personal loans, etc. If you have all this debt and stack on a mortgage payment, you could end up drowning in financial obligations.

So one way to get a more accurate calculation is to modify the original formula factor in your obligations. First, add up all your monthly payments. Then take a look at some of the other monthly expenses associated with the home you are considering – home owner association dues, utilities, etc.

Next, take a look at your monthly gross income. Take that amount and multiply it by 30 percent. Subtract your other monthly debts from this amount, and you have the amount you can afford to pay for a mortgage, plus taxes and insurance.

Do not panic if it suddenly looks like you cannot afford as much as you had hoped. There are a number of mortgage options that make it fairly easy to stay within your budget.

These strategies for calculating your debt give you some basic ideas of what you can afford, and keep you from getting in over your head. The best way to truly understand your buying ability is to call me so we can discuss your options.