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When you buy a house, you'll need to plan for both upfront and long-term costs — the higher the price tag of the house you buy, the more you'll spend on both types of expenses. The price range of houses you can afford will be limited both by what you can afford when it comes to upfront costs like a down payment and closing costs, as well as long-term costs, such as your mortgage payment and everything that's included in that, including interest, taxes, and insurance. How much house can I afford?When buying a house, the general rule of thumb is that you should spend 28% or less of your gross monthly income on housing expenses. This includes your mortgage payments and any other monthly house-related expenses, such as insurance, taxes, and homeowner's association dues. To calculate 28% of your monthly income, multiply your gross monthly income (that's your income before taxes) by 0.28. Let's say your monthly income is $5,000. Multiply $5,000 by 0.28, and your total is $1,400. If you abide by the 28% rule, you can afford to spend up to $1,400 per month on your house, including your mortgage, interest, property taxes, homeowners insurance, and homeowner's association dues. The 28% rule is a general guideline that can help keep you from spending too much of your income on housing. But it isn't universally applicable (particularly if you have an especially high or low income), and it isn't the only data point you should be paying attention to. Determining your debt-to-income ratioHow much house you can afford will also be limited by how much a mortgage lender will approve you for. To determine this, lenders will look at how much you earn each month relative to how much you spend on debt payments (such as student loans or credit card debt). This is referred to as your debt-to-income ratio (DTI). To calculate your DTI, take the total sum of all your monthly debt payments and divide that number by your gross monthly income. For example, if you spend $1,000 on debt each month and your monthly income is $5,000, you have a DTI of 20%. 1,000 ÷ 5,000 = 0.2 To get a conventional mortgage, the maximum DTI you can have is typically 50%, including your proposed monthly mortgage payment. Continuing with our example, this means that if you have a monthly income of $5,000 and already pay $1,000 a month on other debt, the maximum mortgage payment you could be approved for is $1,500. 1,000 + 1,500 = 2,500 With a $1,500 mortgage, your total monthly debt payments would equal $2,500. 2,500 ÷ 5,000 = 0.5 Added up together, all these costs equal 50% of your gross monthly income. The less debt you have, the more room you'll have for your mortgage payment. But remember that just because a lender approves you for a certain amount doesn't mean you should borrow that much. You should still consider how the monthly payment fits into your overall budget Upfront costs to expectBuying a home requires a lot of money from the get-go. Here are three factors to consider:
Monthly expenses to expectIf your monthly housing costs make up a huge percentage of your income, then you may want to take out a smaller mortgage, or find a home that comes with fewer fees. Here are the housing costs to consider:
Mortgage CalculatorHome Price Down payment % Length of loan (years) Interest rate % $1,161 Your estimated monthly payment More details Chevron iconIt indicates an expandable section or menu, or sometimes previous / next navigation options. Total paid$418,177 Principal paid$275,520 Interest paid$42,657 Ways you can save:
Let's say you get a conventional mortgage on a $400,000 home, and you make a 12% ($48,000) down payment. Your interest rate is 6%. Your monthly payment might look something like this: ExpenseCost each monthMortgage payment (principal + interest)$2,110Property taxes$100Homeowners insurance$100PMI$60Homeowner's association dues$50Total monthly home costs$2,420 To lower your monthly costs, you may consider buying a less expensive home, making a larger down payment, or choosing a town with lower property taxes. Ways to boost your buying powerYour interest rate can make a big difference in how much house you can afford. As rates go up, your buyer power decreases. While you can't change general mortgage rate trends, you can work on your finances to get the best rate possible and increase the amount you'll be approved for. You can do this by improving your credit score, paying down debt, or saving for a larger down payment. Paying off credit card debt can be particularly helpful because you'll be lowering your DTI, which can help you qualify for a larger loan. It will lower your credit utilitization ratio, as well, which can boost your credit score. You can also increase your homebuying power by looking for homes in a more affordable area. For example, if you live in a big city, moving to a nearby suburb could help you get more square footage for less money. Laura Grace Tarpley, CEPF Personal Finance Reviews Editor Laura Grace Tarpley (she/her) is a personal finance reviews editor at Insider. She edits articles about mortgage rates, refinance rates, lenders, bank accounts, wealth building, and borrowing and savings tips for Personal Finance Insider. She was a writer and editor for Insider's "The Road to Home" series, which won a Silver award from the National Associate of Real Estate Editors. She is also a Certified Educator in Personal Finance (CEPF). She has written about personal finance for over six years. Before joining the Insider team, she was a freelance finance writer for companies like SoFi and The Penny Hoarder, as well as an editor at FluentU. You can reach Laura Grace at [email protected]. Learn more about how Personal Finance Insider chooses, rates, and covers financial products and services » Read more Read lessMolly Grace Mortgage Reporter Molly Grace is a reporter at Insider. She covers mortgage rates, refinance rates, lender reviews, and homebuying articles for Personal Finance Insider. Before joining the Insider team, Molly was a blog writer for Rocket Companies, where she wrote educational articles about mortgages, homebuying, and homeownership. You can reach Molly at [email protected], or on Twitter @mollythegrace. Read more Read lessEditorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer. Read our editorial standards. Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available. |