If you\u2019re starting the process of shopping for a home, odds are you\u2019ve been planning for this moment for a long time. You\u2019ve probably been building up your down payment, paying off your debts, and even checking out some listings in your preferred city or neighborhood. It\u2019s an exciting milestone, and it\u2019s worth celebrating. <\/p>\n\n\n\n
It\u2019s also a good time to think through an important question: How much can you actually afford to spend when purchasing your home? Setting a housing budget that fits your personal situation is important\u2014not only will it help you target listings, but it will also help you make sure you have enough left over for your other goals (whether that\u2019s retirement, a new car, or sending a child to college). <\/p>\n\n\n\n
There are some standard ways you might start to answer this question, but they have limitations. Online calculators can help you get a simplified estimate, but they lack important context on your unique situation and preferences. Your preapproval letter (when you get one) will use a standard formula to tell you the maximum amount a lender is willing to loan you, but that doesn\u2019t mean it\u2019s what you should spend. And your best friend with a similar income isn\u2019t a good benchmark either, because the most important factor is what you<\/em> are comfortable with. So where should you begin?<\/p>\n\n\n\n Here\u2019s the short answer: <\/strong>To figure out how much house you can afford, start by calculating a comfortable down payment and monthly payment, and use those numbers to back into a home value. Avoid the temptation to spend every penny, and make sure to factor in other large expenses.<\/p>\n\n\n\n Read on for a more detailed explanation. <\/p>\n\n\n\n Your down payment is your initial, up-front investment in the home. The size of your down payment impacts your interest rate, whether or not you need private mortgage insurance (PMI), and how big your monthly payments are. <\/p>\n\n\n\n Conventional wisdom is to make a down payment of at least 20% of your home\u2019s value to avoid mortgage insurance (which is an added cost). But you can put down much more or much less depending on your unique situation. Some buyers put down as little as 3%, and average first-time home buyers put down about 9%<\/a>. A larger down payment can sometimes get you a lower interest rate from a lender.<\/p>\n\n\n\n Once you know roughly how much money you plan to put down on a home, it\u2019s time to start thinking about your monthly payments. These payments will include mortgage principal and interest along with property taxes and homeowner\u2019s insurance (depending on how you choose to handle them, although you\u2019ll need to budget for them either way) and HOA fees if applicable. This calculator from Fannie Mae<\/a> can help you estimate your monthly payments\u2014just be sure to click on \u201cAdvanced View\u201d and factor in those costs as well. <\/p>\n\n\n\n A word of warning: When you\u2019re buying a house, it\u2019s smart to leave yourself a good amount of buffer. That means not spending every penny on your down payment and not committing to a monthly payment that you know<\/em> will put a lot of pressure on you.<\/p>\n\n\n\n You should still leave yourself at least enough wiggle room to cover the following items:<\/p>\n\n\n\n Once you\u2019ve calculated a rough down payment and monthly payment, you can use those numbers to approximate a housing budget.<\/p>\n\n\n\n For example, let\u2019s imagine you have $100,000 saved for a down payment, and you’ve determined that you’re comfortable with a monthly housing payment of $3,000 (which includes all of the costs we discussed in the \u201cmonthly payments\u201d section above and leaves you a sufficient financial buffer). Here\u2019s how you might put that together: Assuming you want to put down 20%, a $100,000 down payment implies a total home price of $500,000. This means you\u2019d be borrowing $400,000. Use a calculator like this one from Fannie Mae<\/a> to make sure you\u2019re comfortable with the associated monthly payments. (You can use additional online calculators to estimate your property taxes<\/a> and homeowners insurance<\/a>.) If your monthly payment comes out to $3,000 or less, you\u2019re in the ballpark. If not, try adjusting the loan amount down until you land on a payment you\u2019re comfortable with. <\/p>\n\n\n\n It\u2019s also important not to forget about closing costs, which are often around 2% of the total home price. In this example, 2% of $500,000 would be $10,000. This means you would want to budget for about $10,000 in closing costs due up front in addition to your down payment. If the extra $10,000 stretches your budget too far, you can consider a smaller down payment and update your plan accordingly.<\/p>\n\n\n\n As you probably know, prevailing interest rates for mortgages can have a big impact on your housing budget. We\u2019ll illustrate this with a quick example. Let\u2019s assume you\u2019re putting 20% down on a $500,000 house and taking out a 30-year fixed-rate mortgage. Ignoring the impact of taxes, insurance, and HOA fees, here\u2019s a simplified illustration of the difference various interest rates (which do not represent actual rates) would make on your monthly payments:<\/p>\n\n\n\n All other things being equal, you will probably be able to afford a more expensive home when interest rates are lower. Conversely, when rates are high, they will put more pressure on your monthly payments.<\/p>\n\n\n\n We hope this guide helps you think through how much house you can afford. A reminder: Your housing budget is primarily a function of what you are comfortable with.<\/strong> Don\u2019t be swayed by friends, family members, or even your preapproval letter. If you\u2019re not comfortable with the payments, then it\u2019s not a good idea. <\/p>\n","protected":false},"excerpt":{"rendered":" If you\u2019re starting the process of shopping for a home, odds are you\u2019ve been planning for this moment for a long time. You\u2019ve probably been building up your down payment, paying off your debts, and even checking out some listings in your preferred city or neighborhood. It\u2019s an exciting milestone, and it\u2019s worth celebrating. It\u2019s […]<\/p>\n","protected":false},"author":10000,"featured_media":17764,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1279],"tags":[],"coauthors":[2538],"class_list":["post-17761","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate"],"acf":[],"yoast_head":"\nStart with your down payment<\/h2>\n\n\n\n
\n
\n
Think through your monthly payments<\/h2>\n\n\n\n
\n
\n
Leave yourself a comfortable buffer<\/h2>\n\n\n\n
\n
Putting it all together<\/h2>\n\n\n\n
Don\u2019t forget about interest rates<\/h2>\n\n\n\n
\n
Stick to your<\/em> number<\/h2>\n\n\n\n