Tips for Figuring Out How Much Home You Can Afford

When you’re ready to purchase a home, it’s important to have an idea of exactly how much you can afford before you start shopping. Without any idea of your monthly budget it’s much more difficult to narrow your home search, and you could wind up getting in over your head if you purchase a house that is way out of your price range. Here are some quick tips for calculating the right size mortgage so you can get the best home for the budget you have available.

Calculate Net Income

Banks base lending on your gross income, but it’s more realistic to look at your net income after taxes—the amount you actually get in your paycheck. This will give you an accurate picture of exactly how much money you have to spend each month on everything you need, from a house payment to entertainment, gas, and groceries.

Create a Realistic Budget

Next, sit down and write down all of your recurring monthly expenses, including:

• Utility bills
• Credit card or student loan debt
• Car payments
• Health and other insurance
• Groceries
• Eating out
• Entertainment
• Shopping

It may help to list these expenses in three categories: essential expenses that you have to pay (like your electric bill), optional expenses (like shopping for new clothes), and essential but flexible expenses (like a grocery bill that you could adjust based on your income and expenses). You may also want to make a separate list of new expenses you will incur as a homeowner, such as homeowners association (HOA) fees, landscaping costs, property taxes, and homeowners insurance.

Identify Available Income for a House Payment

Now that you know your monthly income and your expenses, it’s time to calculate how much of that is left over and available for a house payment. If living in a nicer home is important to you, look at ways you can cut down on optional expenses or modify your lifestyle to put more toward your home. It’s always a good idea to leave some wiggle room in the budget for emergencies, savings, and retirement so if or when these things come up you won’t be in financial trouble.

Use a Mortgage Calculator to Calculate Home Costs

Now that you know how much you can spend on a monthly mortgage payment, hop online and find a mortgage calculator that will tell you what price home you can afford. You’ll need to know your approximate credit score so you can get a relatively accurate estimate of what your interest rates will be. Keep in mind that interest rates can fluctuate, so you should calculate a payment you can afford based on today’s interest rates, as well as 0.5 percent to 1 percent higher, just in case they change.

Talk to Altius Mortgage today to find out more about calculating how much home you can afford, and to find out about current interest rates and mortgage trends.