The decision to buy a home is huge, but many buyers make a major mistake in their excitement: They buy a property they can't actually afford. First, if you buy a home with mortgage payments you can't keep up with, you risk falling dangerously behind to the point where you lose the property to foreclosure.
In a less extreme but almost equally troubling scenario, you might scrounge up enough money to pay your mortgage but fall behind on your remaining bills, racking up unhealthy debt and ruining your credit in the process. Want a better bet? Know how much of your income you can comfortably afford to spend on housing and use that number to guide your buying decisions.
Now, there are several interpretations of the words "housing costs. Therefore, you'll need to research property taxes in the area you're looking to buy in and get some quotes on a homeowner's policy. You should also use an online mortgage calculator to see what mortgage you can afford based on your down payment and estimated taxes and insurance.
Having that information on hand before you get too deep into your home search will not only be useful, but could prevent you from making a major mistake. If you're looking at newer homes, you can veer toward the lower end of that range. If you're looking at older properties, stick to the higher end.
To be clear, the first interpretation of "housing costs" is more common than the second. Chances are you'll have to give up luxuries you've come to enjoy, like dining out, entertainment, and traveling.
And there's a good chance that spending that much on housing will cause you to fall behind on other goals, like saving for retirement or establishing a college fund for your kids. The takeaway: Don't let your housing costs eat up too much of your income. Our team of analysts agrees. Mortgage payments depend on how long your loan lasts and at what interest rate you borrow the money. You can calculate a mortgage payment estimate by looking at the average selling cost for homes for in the area you're looking to move.
Use this Bankrate calculator and input how long you want to have a loan, and your credit score to find what loans for which you'll likely qualify. That will help you determine what your monthly mortgage payments will look like. Location is important when it comes to buying a home. As we've explained in our Rent or Buy workbook, some locations are costlier to buy than to rent, while others are cheaper.
This is also true when it comes to property taxes. Some places have higher property taxes than others. Usually property taxes are a percentage of your home's value. Look up the property tax for the area you're looking to move, and then the average selling price to determine a yearly price for property tax.
Then, divide that by 12 to add to your mortgage payment. Banks will require you to purchase home insurance to protect your home while you have a mortgage. Look up that insurance company's premiums and add the monthly cost to your home costs.
All renters know about the costs of utilities. This can be gas, electricity, water, sewer, trash and more. When you purchase a home, these utilities can be a shock for new homeowners. Suddenly you're paying much more than you used to because your place is larger. It might be a good idea to talk to homeowners in the area to see how much a month they are spending on utilities, and then adding that to your home costs.
That depends on if you're going to purchase a home warranty to protect your home's systems and appliances. If you choose not to purchase a home owners warranty, take a look at the average selling price of the homes in the area, and take percent of that price. Just how much of your income should be going towards your home? As a general rule, you want to spend no more than 30 percent of your monthly gross income on housing.
If you're a renter, that 30 percent includes utilities, and if you're an owner, it includes other home-ownership costs like mortgage interest, property taxes and maintenance. Why 30 percent? It's a standard that the government has been using since : Those who spend more than 30 percent of their income on housing have historically been said to be "cost burdened. Money expert David Bach offers a slightly different rule of thumb, which he outlines in his book, " The Automatic Millionaire ": "According to the Federal Housing Association, a good rule of thumb is that most people can afford to spend 29 percent of their gross income on housing expenses — as much as 41 percent if they have no debt.
Using the FHA's rule of thumb, Bach broke down the range of what you can afford depending on your salary:. These numbers can be applied to rent, Bach notes.
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