Calculating how much house you can afford is essential if you’re looking to buy a home. As interest rates rise, you may be surprised to find that you can afford less than you thought you could. This is also why it’s essential to compare personal loan rates before taking out a mortgage as it will give you a good idea of how much interest you’ll pay on the purchase price. Here’s a step-by-step guide on how to calculate how much house you can afford.
Why should you be concerned with how much house you can afford?
The main reason to calculate how much house you can afford is to understand your financial limitations. If you know how much money you can realistically afford to spend on a home, you can make more informed decisions about what size home is right for you and whether or not a mortgage is a good option.
How to calculate how much house you can afford
There are a few different ways to calculate how much house you can afford. You can use an online mortgage calculator, which will estimate your monthly payments based on your loan amount, interest rate, and loan length.
Another way to calculate how much house you can afford is to use the homeownership subsidy program from the US Department of Housing and Urban Development (HUD). This program provides information on what percentage of median income a household must spend for its income to be considered affordable for purchasing a home.
However, if you’d prefer to calculate things yourself, here’s how to do it:
1. Start by calculating your annual income. This can be done by taking your total annual earnings and dividing them by 12 to get your monthly income.
2. Next, calculate the cost of a 30-year fixed-rate mortgage for a house you think you can afford at the average current interest rate (this will be used as your baseline mortgage payment).
3. Add the amount you would pay for property taxes, home insurance, and other associated costs (such as maintenance or repairs) to the mortgage payment to get your total housing costs each month. You can look up estimates for these costs in your area.
4. After adding up steps 2 and 3, divide the total by 12 to get your monthly “household budget” figure.
5. To determine how much house you can afford, divide the monthly mortgage by your monthly income to get your monthly “household affordability” percentage.
What if the number I get isn’t enough to afford a home?
If your monthly housing costs are more than your monthly income, then you won’t be able to afford the home. In this case, you might want to consider looking for a less expensive home or adjusting your budget to afford a home.
Adjusting your budget doesn’t necessarily mean sacrificing what you love to do; it simply means finding ways to ensure your financial priorities are met. If you plan to own a home within the next five years, you will want to take steps to improve your affordability percentage as quickly as possible.
Improving this could mean adjusting your retirement contributions temporarily into a dedicated savings account for your down payment, starting a side hustle to generate more income, or adjusting your expenses to free up more money (such as shopping at a discount grocery store, not leasing a new car every few years, and using more energy-efficient lighting and appliances in your current home).
Finally, if you’re still coming up short, you might consider looking for homes in an area with a lower cost of living than your current town or neighborhood.
The bottom line
You may not be able to afford the most expensive homes, but there is still a home out there for you. Just find the middle ground and adjust your finances to ensure your new home is comfortable and affordable for your budget.