Posts Tagged ‘calculator’

What Can I Afford?

March 31, 2010

So you have decided that now is the time for you to buy a house.  Perhaps you’ve done some research on what area of town you would like to live, how many bedrooms you’d like, style of home, and other items that are essentials or mere wishes.  But have determined what you can afford?  If you have a monthly payment in mind, is this realistic for your budget?  How do you even determine this?

Calculating this mystical figure is really a simple mathematical equation – no smoke and mirrors.  Let’s start from the lender’s perspective.  They are looking at the percentage of income that your existing debt and future home loan will consume.  The idea is to make sure your new home loan payments do not overwhelm your monthly budget. 

Using industry averages, start by taking your total monthly income and multiplying by 38% (.38).  The answer represents the ideal amount of your new mortgage payment and total debts.  (Debts include installment loans like car payments and revolving debt like credit cards.) 

For example;  If you earn $42,000 a year, your monthly income is $3,500.  ($42,000/12 months = $3,500)

$3,500 x .38 = $1,330

$1,330 is the combined total of current monthly debt and projected house payment.

Take this number ($1,330 in this example) and subtract your total debt.  The answer is the targeted maximum amount of your new home loan payment.  Keep in mind this number reflects the principal payment, interest payment, taxes and home owners insurance.  If you are not using an escrow account for your taxes and insurance, this targeted amount should be lower.

Here’s another way to look at this.  Let’s calculate just a total monthly payment by taking your total monthly income and multiply by 28% (.28).  This again is an industry average where a range of 25 – 30% is the target. 

Using the same numbers as the example above; $3,500 x .28 = $980.  Again this answer represents a principal payment, interest payment, taxes and home owners insurance.

How about another perspective?  What you qualify for, may not represent what you can realistically afford.  Does either of these amounts you just calculated seem realistic for your budget and comfort level?  Depending on your approach to personal finances, this may seem high.  If you currently have a high debt load, this amount may be surprisingly low.  Nothing could be worse than to have the joy of new home squashed by discovering you are now “home rich” but “cash poor”.  

Qualifying amounts should be used as guidelines and not absolute rules.  Consider other factors that contribute to your monthly budget.  How many kids do you have?  Will any of them need braces, require extra medical care or want to go to college someday?  Do you like to travel, try new restaurants or attend sporting events?  Are you adventurous and want to get the “project” home that becomes truly your own? 

When considering what home to buy, also consider that you are committing to a loan that extends over a lengthy period of time.  Thirty (even fifteen) years are a large portion of your life, during which “life” is going to happen.  Be prepared for those occurrences by not over extending yourself with a mortgage payment that keeps you awake at night.

Our intent is to provide some guidance in helping you determine what monthly payment you can undertake based on your particular budget and needs.  If you would like to take this a step further to determine how much house you can afford with these payments, give us a call.  Our business is based on working for you and your long-term goals.  We also have a number of different calculator options on our website to help you make informed decisions when purchasing or refinancing your home.