Buying a house is one of the biggest financial decisions you will ever make. It can also be one of the most exciting and rewarding experiences of your life. However, before you start browsing for your dream home, you need to ask yourself a very important question: How much house can I afford?
This question is not as simple as it may seem. There are many factors that affect how much house you can afford, such as your income, debt, down payment, interest rate, taxes, insurance, and maintenance costs. You also need to consider your personal preferences, goals, and lifestyle. You don’t want to buy a house that is too expensive and end up struggling to pay the mortgage or sacrificing other aspects of your life. You also don’t want to buy a house that is too cheap and end up regretting it or missing out on better opportunities.
To help you answer this question, we have compiled some tips and tools that can help you calculate how much house you can afford based on your current situation and future plans.
Tip #1: Use the 28/36 rule. One of the most common and simple ways to calculate how much house you can afford is to use the 28/36 rule. This rule states that your monthly housing costs should not exceed 28% of your gross monthly income, and your total debt payments should not exceed 36% of your gross monthly income. This rule ensures that you have enough money left over for other expenses and savings after paying your mortgage and other debts.
To use this rule, you need to know your gross monthly income and your monthly debt payments. Your gross monthly income is the amount of money you earn before taxes and other deductions. You can find this amount on your pay stub or by dividing your annual income by 12. Your monthly debt payments include any existing obligations such as credit cards, student loans, car loans, etc. You can find this amount by adding up all your minimum payments for each debt.
For example, let’s say you earn $60,000 a year, which means your gross monthly income is $5,000. You also have $500 in monthly debt payments. To apply the 28/36 rule, you need to multiply your gross monthly income by 0.28 and 0.36:
$5,000 x 0.28 = $1,400 $5,000 x 0.36 = $1,800
This means that your maximum monthly housing cost should be $1,400, and your maximum total debt payment should be $1,800. Since you already have $500 in monthly debt payments, this means that you have $1,300 left for your mortgage payment.
Tip #2: Use an online affordability calculator. Another way to calculate how much house you can afford is to use an online affordability calculator. These calculators are easy to use and can give you a more accurate estimate based on more factors such as your down payment, interest rate, taxes, insurance, and maintenance costs.
There are many online affordability calculators available on the internet, but here are some of the most popular ones:
- Zillow’s affordability calculator: This calculator allows you to customize your payment details while also providing helpful suggestions in each field to get you started. You can calculate affordability based on your annual income, monthly debts and down payment, or based on your estimated monthly payments and down payment amount.
- NerdWallet’s affordability calculator: This calculator allows you to compare different scenarios based on different inputs such as income, debts, down payment and interest rate. It also shows you how much house you can afford in different locations based on the local median home price.
- Chase’s affordability calculator: This calculator allows you to estimate a comfortable mortgage amount based on your current budget. It also shows you how different factors such as income growth rate, property tax rate and homeowners insurance rate affect your affordability.
Tip #3: Consider other factors. While using the 28/36 rule or an online affordability calculator can give you a good idea of how much house you can afford, they are not the only factors that matter. You also need to consider other factors that may affect your affordability such as:
- Your personal savings goals: How much money do you want to save for retirement, education, emergencies or other purposes? How will buying a house affect your ability to achieve these goals?
- Your spending habits: How much money do you spend on things like food, entertainment, vacations or hobbies? How will buying a house affect your lifestyle and budget?
- Your future plans: How long do you plan to stay in the house? Do you expect any changes in your income or expenses in the near future? Do you plan to have children or pets? How will buying a house affect these plans?
- Your risk tolerance: How comfortable are you with taking on debt? How confident are you in the stability of your income and the housing market? How prepared are you for unexpected costs or events?
These factors are more subjective and personal, and they may vary depending on your situation and preferences. Therefore, you should think carefully about them and weigh them against the numbers you get from the 28/36 rule or the online affordability calculator. Ultimately, you should buy a house that fits your needs and goals, not just your budget.
Buying a house is a big decision that requires careful planning and research. To calculate how much house you can afford, you can use the 28/36 rule or an online affordability calculator to get a rough estimate based on your income, debt, down payment and other costs. However, you should also consider other factors that may affect your affordability such as your savings goals, spending habits, future plans and risk tolerance. By doing so, you can find a house that is not only affordable but also suitable for your lifestyle and dreams.