How Much House Can I Afford?
— Written by Dr. Carolyn Bird, AFC
Carefully selecting a mortgage is just as important as selecting the right-for-you house to buy. After all, even if you find your “perfect” house it will be difficult to enjoy it if your mortgage terms cause stress or place you in danger of losing the home.
As a home buyer you will want to invest time in learning about mortgage products and researching a few lenders before contacting a real estate professional to look at your first house. To get started you will need an idea of how much house you can afford or how much you can afford to pay for a monthly mortgage payment. Mortgage payments are a composite of several expenses that are all rolled into one monthly payment. Real estate agents will refer to “PITI,” which stands for “principal,” “interest,” “taxes,” and “insurance (homeowners).”
Online mortgage calculators give a monthly mortgage estimate that includes only principal and interest payments. So, the actual payment will be somewhat higher. You can contact the county real estate assessor’s office for the tax rate per $100 of the home’s value. The provider of your renter’s insurance may be able to give you an idea of the annual cost of homeowner’s insurance for the price range and geographic area you are considering for your new home. Now that you have an estimate of the escrow costs for taxes and insurance you can use these to more fully estimate your monthly mortgage payment.
How much house you can afford is directly related to the mortgage interest rate. For example, a $250,000 loan amount at 4% will have a monthly PI payment of $1193.54. At a lower interest rate of 3.75% the PI payment is $1157.79. You can try different mortgage rates at www.mortgagecalculator.org
When considering whether a home is affordable, don’t forget about accounting for the peripheral items. In some areas homeowners will pay separate fees for trash collection and large item removal. Remember also that you will have ongoing expenses for utilities and transportation to and from work.