Home ownership can be a great step on the road to achieving your personal and financial goals, but how do you know if you can afford a mortgage for a particular home? Real estate agents and lenders may give you answers based on their own calculations and goals, but they won’t be able to account for your own plans or financial well-being. Here’s a look at a few ways to know how large of a mortgage you can comfortably afford.
How to Know You Can Afford a Mortgage:
- Look at how the mortgage factors into your budget. Conventional financial wisdom dictates that all of your essential bills, such as mortgage, cars loans, utilities and credit card bills should never take more than 43 percent of your total income. Make a thorough budget of all of your expenses, including debt payments, and make an honest assessment as to whether this mortgage would take you over the 43 percent mark. There may be lenders willing to make you a loan for a more expensive home, but you should think seriously before accepting any loan that puts you above this range.
- Consider the down payment in your calculation. Obviously, the more you can afford to pay for your down payment, the less you are going to have to borrow. It is usually smart to have a down payment of 20 percent or more, since this allows you to avoid paying for private mortgage insurance. There are, however, cases where it might be wiser to buy before you have saved a large down payment, including situations where interest rates are quickly changing. The important part is that you factor the size of your down payment into your calculations, since this can have a big effect on your costs down the road.
- Use your current rent as a reference. One accurate way of finding out how large of a mortgage you can afford is to go by your current rent. Since there are tax benefits to owning a house, you should be able to afford about a third more in mortgage payments than in rent. To find how much you can afford with your current standard of living, simply multiply your current monthly rent by 1.33 to get the size of a monthly mortgage rate.
Choosing a home is the largest financial decision that most Americans make in their lifetime. There are many factors to consider, such as family needs, neighborhood and personal fit. It helps to go into your home search with a firm sense of your price range, so that you can focus on finding a home that is right for you.
Garland & Mason, L.L.C. is a New Jersey business law firm with a passion for in real estate law.