How to calculate how much house you can afford
Homeownership is a dream for many people, but figuring out how much house you can afford is the first step to making that dream a reality. To help simplify this process, we’ve created a guide on how to calculate how much house you can afford by considering various factors such as your income, expenses, and debt.
1. Determine Your Monthly Income
Before you start hunting for your dream home, determine your monthly income. This includes your salary, any bonuses or commissions, and any additional income sources. Add up all of these amounts to determine your total gross monthly income.
2. Calculate Your Monthly Expenses
Next, consider your monthly expenses which include – but are not limited to – mortgage/rent payments, utilities, groceries, transportation costs, insurance premiums, student loan repayments and more. Create a detailed list of every expense you anticipate over the course of a month and ensure to leave some room for savings and emergency funds.
3. Calculate Your Debt-to-Income Ratio (DTI)
Your debt-to-income (DTI) ratio is an important factor when determining what size mortgage you can afford. The DTI compares your total monthly debt payments to your gross monthly income. Ideally, lenders prefer borrowers with a DTI of 36% or lower – including the mortgage payment.
To calculate your DTI ratio:
a. Add up all of your minimum required monthly debt payments
b. Divide the sum by your gross monthly income
c. Multiply the result by 100
4. Determine Your Desired Down Payment & Loan Term
A down payment is required when purchasing a home, typically ranging from 5-20% of the purchase price. The greater the down payment you can make, the less money you’ll need to borrow from a lender – which often results in lower interest rates and better loan terms.
As for the loan term: mortgages are often offered in 15-year and 30-year terms. While a shorter loan term results in higher monthly mortgage payments, you will usually pay less in interest over time.
5. Evaluate Mortgage Interest Rates & Loan Types
Mortgage interest rates and loan types play a crucial role in determining how much you can afford. Research different lenders and the types of loans they offer, such as fixed-rate mortgages or adjustable-rate mortgages (ARMs). The lower the interest rate, the more you can afford to borrow.
6. Use Online Calculators & Consult with Professionals
Online mortgage calculators can be a helpful tool when determining how much house you can afford. Input your monthly income, debts, and desired down payment to receive an estimation on your affordability.
Additionally, consult with financial advisors or real estate agents to gain a better understanding of homeownership costs in your desired area.
At the end of the day, only you know your financial comfort zone. Remember to assess all aspects of your financial situation and maintain a practical perspective when making such an important decision. Happy house hunting!