Much more goes into affording a home than paying the mortgage. As real estate developer Corey Shader explains, there are many other monthly costs that homeowners need to work into their budget when they’re trying to figure out how much of a home they can afford.
Relying on only the monthly mortgage payment as the determining factor of affordability is short-sighted and can lead to financial ruin. However, here are some things everyone needs to consider when trying to figure out how much home they can afford.
Closing Costs
Closing costs are what you will be required to pay upfront to “close” the loan. Then, when you sign the mountain of paperwork, these costs are due, making the home officially yours.
Most homeowners included in closing costs are down payments, upfront property taxes, and homeowners’ insurance.
The down payment is often the largest portion of your closing costs. Most lenders require a down payment of at least 20% to qualify for the best rates with a conventional mortgage. That amounts to $40,000 on a $200,000 home, for example.
In many cases, your homeowner’s insurance and property taxes will be paid through escrow, meaning it will be a part of your monthly mortgage payment. However, it’s also possible that your insurance company will require you to pay for the first year in advance.
Interest Rate
Mortgage interest rates are at all-time lows, which makes owning a home a lot more affordable today than many times in the past. Still, your interest rate will be a huge determining factor in your monthly payment.
A 1% difference in your rate could mean a difference of $100 or more on your monthly payment. For instance, a 3.99% interest rate on a 30-year fixed mortgage would have a monthly principal and interest payment that’s $111 more than one with a 2.99% interest rate.
The better your credit history and debt-to-income ratio, the better the interest rate you’ll qualify for. So, put yourself in the best position possible by getting your finances in order before applying for a mortgage.
Your Other Liabilities
For most people, house-related expenses won’t be the only monthly liabilities they’ll have. Car payments, insurances, student loans, and other revolving debt is common. Plus, you have to factor in money for savings, food, gas, and discretionary spending.
Corey Shader suggests that all homeowners follow what’s known as the 28/36 rule when determining how much house they can afford.
This rule states that you shouldn’t spend more than 28% of your gross monthly income on all housing expenses, and you shouldn’t spend more than 36% of it on total debt.
To calculate this, start by adding up your monthly income sources. Then, take that number and multiply it by 0.28.
If your gross monthly income is $5,000, for instance, then you shouldn’t spend more than $1,400 per month on housing expenses, as 5,000 x 0.28 is $1,400. If you follow the other half of the rule, your total debt shouldn’t exceed $1,900 per month — including all your housing-related costs.
By following these tips, you’ll be able to see more clearly just how much house you can afford.
About Corey Shader
Corey Shader is a self-made entrepreneur, consultant, investor, real estate developer, and founder of several companies, notably Insurance Pipeline. Operating primarily out of Ft. Lauderdale, Corey’s endeavors span the nation, consulting for start-ups and sitting on the board of digital media and senior healthcare agencies. As a consultant, Corey helps young businesses develop sales funnels and maximize profitability. In addition, shader takes pride in challenging others to push themselves to be their very best — he believes in constant self-improvement, inspiring others through sharing his own life experiences.