One of the biggest mistakes home buyers make is choosing a house that is the highest mortgage they can afford. But sometimes you qualify for a mortgage that is more than you can handle. Here are some tips when thinking about how much house you can really afford.
Consider your monthly budget
Financial planners recommend limiting the amount you spend on housing to 25 to 30 percent of your monthly budget. This rule will help you determine a reasonable housing budget.
This also means you need to have a clear picture of your monthly expenses. Consider investing in some budgeting software or working with a financial planner to figure out your debt-to-income ratio. This is not only important for home buying, but something you should get in the habit of doing for your overall financial wellness.
Use a mortgage calculator
A mortgage calculator, like this one from Trulia, can help you determine what you will actually be paying each month, including your Homeowner’s Insurance and any HOA fees. It is important to have an accurate picture of exactly how much your monthly payment will be in order to determine what you can afford.
Budget for up-front costs
While it’s important to figure out how much your mortgage will cost in terms of monthly payments, you also need to make sure you have enough money saved to cover the up-front costs of buying a house.
Your down payment is only the first step. You also need to factor in closing costs, lender fees, property inspection(s), movers, etc. Don’t let these expenses take you by surprise and force you to drain your emergency fund.