How Much House Can You Afford?
It is very easy for common sense and practicality to be thrown by the wayside when standing in the foyer of a home that exceeds all your expectations and dreams, and quite possibly your budget. Suddenly you are visualizing how great life will be in your new home. You discover the house has a pool in the backyard and it’s over. You schedule an appointment with your lender. You are going to buy THIS house no matter what.
When it comes to buyers and their dream homes, budgeting and financing skills can become quite creative. Before you make a final decision on a home, carefully examine your expenses and income. Many buyers make the mistake of ‘guesstimating’ how much they can afford to spend. It’s difficult to let go of your ideal home after your heart is set on it. Calculating a monthly payment is easy; it’s determining the amount of the loan that can be tricky.
If you have ever found yourself wondering at the end of the month where all the money went, you are not alone. Most people do not develop a budget until they are planning for a major purchase. As you begin planning for your home, you will need to know exactly how much you spend each month to determine how much you can afford for a mortgage. Do not totally rely on your real estate agent and/or your lender to tell you the amount you can afford to borrow. They can offer good counsel, but ultimately it is your decision because you know your finances better than anyone. Only you know if you will feel comfortable with the monthly payments.
In most cases, 25-36 per cent of gross income is the maximum percentage that should go toward a mortgage payment. Lenders will include an additional 5 per cent to be earmarked for all other debts, bringing the total to 30-41 percent. This is a general guideline and some lenders or specific loan programs will allow that limit to be raised a little. Lenders figure your total housing expense using the PITI formula (Principal, Interest, Taxes, and Insurance). Property taxes, insurance, maintenance costs, private mortgage insurance (PMI is usually required with less than a 20 per cent down payment or equity in your home), closing costs, and association dues should ALL be calculated and considered as you develop your budget. When you add these additional costs you may find the amount you can borrow has decreased, but better to budget for these expenses now than become financially strapped later.
Call your local tax collector or assessor’s office to get an accurate figure for your property taxes. Do not rely on the previous owner’s bill as his or her tax was based on his or her purchase price. Some buyers prefer to pay their property taxes along with their monthly mortgage payment. Occasionally, buyers are required to establish an impound account to pay the taxes if a small down payment is involved. A portion of your mortgage payment is placed in an account and accumulates until the tax bill is due. When tax time rolls around, the money is available to cover the bill.