I Want to Buy a New House: How Much Can I
Afford

From LoveToKnow Mortgage

It’s a common question among potential homeowners: “I want to buy a house – how much can I afford?” A better question might be this: “How much can I comfortably afford?”

The Bug to Buy

Buying a new house is a big decision, but some people enter into it without much regard for the actual financial impact that homeownership can have. It is a wise decision to take the time before actually applying for a mortgage loan to find out how much you can afford without putting yourself into financial peril.

Buying a home should not be an impulsive purchase!

More than a Mortgage Payment

When you are trying to decide how much of a mortgage payment you can afford you need to take into consideration that there is much more to monthly home expenses than just the mortgage payment.

  • Taxes: The county – and sometime the state – you live in charge real estate taxes that depend upon the tax rate in your location and the assessed value of your home. Taxes can be added to your monthly mortgage payment, or in some cases you might be able to pay this amount in an annual lump sum. Nevertheless, it is an additional expense that you did not encounter when renting.
  • Insurance: Homeowners insurance is not simply a good idea…it’s required by mortgage lenders to protect their investment. If you currently pay renter’s insurance you are familiar with this expense, but chances are your homeowners insurance will cost more each month than your renter’s insurance.
  • Repairs: When you own your home there is no landlord to swoop in and make necessary repairs. You never really know what kind of repairs will pop up, whether it’s an inexpensive caulking job or instead a costly foundation repair. You need to not only pay for these repairs, but you also need to have enough money in your budget to set aside each month as an emergency repair fund. (A housing inspection can help identify any esisting problems prior to purchasing the home.)
  • Upkeep: There are plenty of upkeep projects around the house which may not fall into the same category as repairs, yet this upkeep can potentially cost money. For example, you’ll need a lawn mower to cut the grass, you’ll want to adjust your décor occasionally, and you may want to pay someone to accomplish some of the needed upkeep. These are concerns you may not have dealt with as a renter.

It is not sufficient to simply assume that if you can comfortably pay your rent that you can automatically afford the same amount with a mortgage payment.

Adjustable Rates

Keep in mind that an adjustable rate mortgage (ARM) can encounter multiple interest rate increases over the years, and for this reason you want to make sure that you are looking at the bigger picture. Don’t accept an ARM that features an initially low interest rate that you can afford, but that has the real potential to increase to a payment that you’re unable to afford within a year or two.

I Want to Buy a House – How Much Can I Afford Comfortably?

There are plenty of mortgage affordability calculators available online which can estimate your mortgage payment in addition to online calculators which assist you in deciding whether it is more financially advantageous for you to buy a home or continue with renting.

It’s important to remember that the amount of money your lender approves you for may not be the best amount to actually borrow. Lenders will often approve applicants beyond the amount that was originally applied for, but the acceptable debt-to-income ratio of that lender might be quite high. This means that accepting the highest amount you qualify for may result in financial problems down the road as you struggle to maintain a housing payment and all the accompanying expenses that come along with it.

Take care to budget realistically when asking yourself, “I want to buy a new house – how much can I afford?”

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Comments

You're right; homebuyers certainly have an advantage nowadays with the Internet as a valuable resource. Thank you for the comment.

-- Contributed by: Tamsen Butler

I've found that using online sites is a great tool and really useful for finding out what's in your price range. After you complete the buyers profile with price specification, they'll match you with all the sellers within that price range. It was a great resource for me when I was trying to buy a home.

-- Contributed by: SSmith

Yadira, my suggestion is to contact a mortgage consultant at a reputable lender to review your options for buying a new home. You may want to make an attempt at selling your current home before buying a new home unless you have the financial means to make two mortgage payments or are willing to sign up for some creative (and higher interest) financing. Good luck!

-- Contributed by: Tamsen Butler
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