I remember that question being a huge concern as I was shopping for a new home a few years ago. And if you’re a first-time home buyer, that’s probably the biggest question you have, too.
How you answer it matters. Taking on too large of a mortgage could leave your budget feeling the pinch. Before you start hunting for your dream home, it helps to find your financial comfort zone for owning.
Choose Your Payment Target
When asking how much house can I afford?, set a baseline for the maximum amount you’re willing to pay. Use a mortgage affordability calculator to get an idea of what you can afford, based on your income and debt payments, then compare that to your target number.
As you’re doing the math, remember that credit matters for home affordability. A lower credit score could mean a higher interest rate on a mortgage.
“The interest rate you’ll qualify for can have a significant impact on the monthly payments of a home you’re considering,” says Rae Dolan, a real estate agent in Katy, Texas and co-owner of Audrey Micah Investments, a real estate investment company.
Look Beyond the Principal and Interest
As you play around with the numbers, be sure to account for additional costs that could affect your payment, such as property taxes, homeowner’s insurance, and homeowner’s association dues.
Dolan recommends escrowing these costs into your mortgage, versus paying them individually each year. Including them in your calculations with a mortgage affordability calculator can give you a realistic idea of whether a home fits your budget.
“If you can’t afford the monthly payment for a home you’re considering with the taxes and insurance rolled into the payments, then you probably won’t be able to make them as lump sum payments either, and you can’t afford the home,” Dolan says.
Routine maintenance and repairs also add to the home ownership tally. The age and size of the home can influence how much those will cost you.
“Be sure to factor in the age of any big-ticket items, such as the HVAC system, roof and water heater,” Dolan says, and consider the cost of having to replace them sooner, rather than later. Paying a few hundred dollars to fix an issue up front might serve you a lot better than paying thousands to replace it later on.
Also, remember that a bigger home may mean higher utility bills or bigger repair bills if you need something like a major roof overhaul. Dolan says you don’t want to be surprised by a water or electric bill that’s two to three times what you’re used to paying.
Don’t Forget the Down Payment
“How much house can I afford?” is often associated with the monthly cost of owning, but your buying budget should also include your down payment.
You may have heard that you’ll need 20 percent down to buy; in reality, the average down payment is around six percent of the purchase price. The more money you put down, the less you have to finance and the lower your mortgage payment may be.
On the flip side, putting less than 20 percent down could mean paying private mortgage insurance (PMI). Running different scenarios for a down payment with a mortgage affordability calculator can help you see how much PMI could add to your monthly payment.
Still wondering if you’re ready to buy? Check out these frequently asked questions to help you decide.