How Much House Can I Afford?
Trying to understand more about homeownership costs? There are a few things to consider, and while mortgage calculators can help, you’ll want to do a little background work to determine your financing options as a first time buyer or even a repeat home buyer. Here are a few things to consider before you decide how much home you can afford.
A great way to get an estimate for how much home you can afford is to use the 30 percent rule. This dictates that you shouldn’t spend more than 30 percent of your pre-tax income on your monthly mortgage. Even if you’re a prospective new homeowner, this rule might be a familiar one since it’s also typically applied to renting.
You shouldn’t use this 30 percent rule as a hard number though, because your circumstances may be different. It’s a good place to start, but there are some other things you might want to consider. For example, your mortgage might not include the total amount that you have to pay every month. There could be other fees, like mortgage insurance, homeowners insurance, HOA fees, and property taxes. Consider including all of these figures as part of your 30 percent. Or, if you’re concerned about saving up for retirement or other important life moments, you might want to spend less than 30 percent.
We’ve already mentioned some of these costs, but they are worth exploring more in-depth. Consider these homeownership costs you might have to pay on top of your mortgage before deciding what percent of your income you want to commit to a new home.
Not all homes will come with HOA fees, but many of them will. These fees cover things like lawn care, snow removal, community amenities, and regular maintenance of the property. Just keep in mind that HOA fees never really go down, but they are likely to go up over time. If you take out a mortgage on a home that includes HOA fees, you’ll definitely need to factor these fees into your total homeownership costs. Still not sure what an HOA is or if it makes sense to buy a home that has an HOA fee associated with it? Check out our What is an HOA? post to learn more with some frequently asked HOA questions.
If you take out an FHA loan or a standard loan with less than 20 percent down, then you’ll likely have to pay mortgage insurance for at least some period of time. In the case of an FHA, you’ll have to pay mortgage insurance for the duration of a loan. Mortgage insurance premiums cost on average, between 0.5 to 5 percent of the original loan amount. On a $150,000 loan, assuming an annual premium of 1 percent, you’d end up paying $1,500 each year ($125 per month) for mortgage insurance. While that may feel like a lot, mortgage insurance is worth it if you aren’t sure you can do a down payment at 20 percent down.
Considering a fixer-upper? Did you know that on average, homeowners spend over $7,500 each year on home improvements? If you’re considering a home that needs work right away, you might want to estimate remodeling costs before you commit to the home. A small bathroom remodel, for example, could cost a little under $4,000 but most homeowners spend between $6,000 and $16,000. The average range for remodeling a kitchen is between $12,000 and $35,000. When you factor in those additional costs, you may decide to shift your evaluation of how much house you can afford to how much does it cost to build a new home? Ultimately, you may find the potentially higher up front cost is worth it.
While there are other things that will impact how much home you can afford, like your credit score, which could affect your home mortgage rates, or your current debts. And although the 30 percent rule is a good place to start, there are additional financial steps you can take to afford your dream home, so be sure to fully assess your current financial situation and take the time to find the home or home builder that will work best for you and your family.
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