How Much House Can I Afford?

A home tends to be on the of the biggest investments made. So when you are wondering which home to buy, it is important to know how much you can afford. It is often said that you should buy a home that is no more than two and a half times your base annual salary. However, it is imperative that you don’t use that general rule without taking your financial and personal resources into account. Many people end up struggling to meet the financial demands of home ownership. But by doing some calculations in advance, you can be assured that your home will be a source of pleasure and memories and not a poor investment.

You can use one of the many calculators online to estimate what your mortgage payment would be each month. Some of the calculators (links are provided below) will tell you how much home you can afford based on your salary, while others will estimate what your monthly payment would be. Both of these numbers are totals that you need to be both familiar and comfortable with. It is important to remember to include your Personal Mortgage Insurance (if your down payment is less than 20%), which can add upwards of $250 to your monthly payment. You also need to include your insurance payment. Obtaining quotes from several insurance companies will give you an estimate on what your payment will be. While some people choose to pay their insurance twice a year, others opt to pay the premium on a monthly basis. Some mortgage companies will even add this into your payment for you.

Once you have your base payment, you will need to figure out what your taxes will be on the home you are looking to buy. Most home listings give you a general idea of what the taxes are, however it is extremely important to confirm that figure with the tax assessor. The tax figure may include exemptions or discounts that the previous owners qualified for that a new owner may not. Taxes are usually paid to the mortgage company and kept in an “escrow” account, the mortgage company then will pay the taxes on the property from that account. Once you have an accurate number for the annual taxes, you should divide that number by 12 (months) and add that to your monthly housing payment. It is also important to

Now that you have a general idea (remember that interest rates and credit scores may make your payment fluctuate), it it time to look at the rest of your budget. Listing your monthly payments and expenses, along with the estimated mortgage payment will help you visualize if you can, in fact, afford the home you are looking at. You want to be sure that the home you’re purchasing will still allow you to make your payments and meet other financial obligations that you have. Once you own your home, is important to create a home budget (link to previous article) to keep track of and stay on to your budget.

 

Kent Smetters

Kent Smetters is the Boettner Chair Professor at The Wharton School of the University of Pennsylvania, the Interim Faculty Director of the Penn Wharton Public Policy Initiative, and a Faculty Research Fellow at the NBER. He was the former Deputy Assistant Secretary of the U.S. Department of the Treasury, and he subsequently served as a member of the U.S. Congress’ bipartisan Blue Ribbon Advisory Panel on Dynamic Scoring. Kent holds bachelor degrees in Economics and Computer Science from The Ohio State University as well as an MA and PhD in Economics from Harvard University. He previously cofounded a national registered investment advisory firm that built a new technology platform, grew the firm to over 50 advisors and then sold the firm to a large, publicly-traded company. Growing up in a financially poor family, Kent donates his time to “Your Money” to help families work, save and set goals in order to achieve the most in life. Kent is often cited in major news outlets.