Buying a house is a huge decision, and one that you should not make lightly. Once that you've decided that you're ready to buy a house, you now need to decide how much house should you buy. You don't want to end up house poor (or even in financial trouble) if you buy more house than you can really afford.
Typically, a mortgage company is willing to lend an amount where your monthly mortgage payments are about 28% off your gross income. But, that's just a generality, and the bank doesn't know your situation.
Rather than submitting all your information to the bank and letting the bank tell you how much money they are willing to loan to you, first take an honest look at your budget to determine how much money you can afford to spend on housing and then base your decision on those numbers. You can only afford what your budget says you can afford.
Just remember, there's a lot more expenses to buying a house than just the principle plus interest amount that you pay each month. You'll need to also factor in money for property taxes, homeowner's insurance, PMI (if you have a down payment less than 20%), possible HOA fees, maintenance, and more into your monthly housing budget amount. Plus, if you move into a bigger house, your utility costs can also increase significantly.
Plus, do you want to take out a 30 year loan or can you buy less expensive house and take out a 15 year mortgage? You can save thousands of dollars by paying off your mortgage in 15 years rather than 30. You can use an online calculator to see how much you'd save with a 15 year mortgage.
Once you have an amount that you think will work within your budget, try it out for a few months. Each month, take the amount that you would pay if you purchased a house (including all escrow amounts like property taxes, homeowner's insurance, and PMI), subtract out your current rent payment and put the remaining money in savings. For a few months, test if you can live comfortably on the remaining money that you would have left over.
Our Story:
I shared this when I wrote about how I became a Stay-at-Home mom, but when my husband and I bought our first house we were both working good jobs. We had plans for me to quit my job in the next couple of years when we started having kids, so we based how much home we could afford on our lower income in several years rather than what our current income was. The bank would have lent us far more than we could afford on a single income, but we chose to borrow less and buy a smaller and older house.
So, be sure to look at future goals and your budget to determine how much house you can afford.
How about you? If you already own a home, how did you decide how much house to buy?
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