03 Oct Planning to Buy a Home? Here’s How to Determine What You Can Afford
Every time you drive through that neighborhood on your way home from work, the apartment you walk into seems so small. You look closer at the houses you pass by, and they seem perfect. Even when you are visiting friends’ homes, you wonder how they can afford to live in a house as big as they do. Maybe it’s time to take a step outside your apartment and start planning to buy a home.
But can you? Is a mortgage a reasonable expenditure to take on now? It can be, depending on what you are willing to take. Here are a few things to know to help determine what you can afford if you are planning to buy a home.
As the name suggests, your DTI measures how much of your income is consumed by existing debt. Typically, to qualify for a traditional mortgage, your DTI would be expected to be 36% or less, meaning the amount you owe in debt is less than 36% of your annual income. However, there are other options available that allow for higher DTIs.
The amount you put down on your house at settlement is largely up to you, though most loan officers require at least 3% of the total value of the house. However, the more you can pay upfront, the lower your monthly payments will be, and the more equity you will already have in your house. It is not advised to wipe your savings account dry, though, so discuss with your financial advisor what would be the best amount to put down.
You might read what current interest rates are in the housing market, but the truth is that the interest rate on your mortgage is determined by the loan company and varies with your credit score, the house value, down payment, and other factors. Average mortgage rates vary almost daily, but you can figure out a reasonable estimate by checking at any bank or looking online.
After you have looked at current interest rates, you will see that they vary based on the term as well. The most common term is a 30-year fixed rate. You will see that interest rates are lower for a 15-year rate, but that is assuming you have the wherewithal to pay your entire loan off in 15 years. (Translation: Higher monthly payments.) You will also notice lower rates (usually) for an ARM (adjustable-rate mortgage). An ARM is a little like playing roulette. There’s no sure way to know if rates will go up or down, so not locking in with a fixed rate leaves you more volatile.
Maximum Mortgage Payment
Once you have looked at all of the factors leading to what you will be paying, you may be able to come up with a general idea of what makes up your monthly mortgage payments. Next, you are going to want to find a number for your budget, to see what you truly can afford. Keep in mind the Rule of 28, which says that your mortgage payment should be no more than 28% of your gross income.
After you have examined each of these pieces involved in buying a home, you can use an online mortgage calculator to see what your monthly payments would look like on the house you want, and whether or not it’s something that you can work into your budget.
Buying a home is a huge expense, but you deserve a place to call your own. With sound financial planning, you may find you’re closer to your goal than you thought possible. If you’re ready to start planning to buy a home, come see us at the Hopman Group. We’ll help you get started on a financial path that leads to your dream-come-true.