One of the more common ways for homebuyers to determine how much home they can afford is to immediately reach out to a mortgage broker and lender for prequalification. Getting prequalified for a home loan is an important step in the buying process, and it should be done before you begin house hunting in most cases. However, the mortgage prequalification process does not take into account all of your lifestyle expenses, such as childcare expenses or how frequently you enjoy going out on the weekends. It also does not tell you what mortgage amount is actually affordable for your budget. Instead, it tells you the maximum mortgage amount that you qualify for based on the lender’s specific guidelines. Rather than to take this figure at face value and stress out your finances, consider taking a few additional steps so that you can decide what mortgage amount is truly affordable for you.
Determine a Desired Down Payment Amount
The principal loan amount for your new mortgage is calculated by subtracting your down payment amount from the sales price. With this in mind, you need to have a reasonable idea about what housing prices are in your area, and you need to know what down payment amount is affordable for you. Some people believe that making the largest down payment possible is in their best interest. However, it is usually wise to keep the equivalent of at least three months of your mortgage payment amount in liquid form. In fact, your lender may require you to do so.
Analyze Anticipated Changes to Your Budget
Each house that you have the opportunity to purchase can affect your budget in different ways. For example, the HOA dues, utilities expense, repair costs, commuting cost to work, property taxes and home insurance cost all play a role on your budget. You may assume that some of these expenses would be more or less the same for various houses located close to each other, but this is not the case. For example, a new home in a neighborhood with numerous community amenities may have much higher HOA dues paired with more affordable utilities. On the other hand, an older home in a rural location may not have HOA dues at all, but an older home may be less energy efficient.
Leave Ample Room to Save and Invest
When you begin analyzing the mortgage payment amount that is affordable for you, you need to remember to adjust the previously mentioned expenses in your budget for each home that you consider buying. In addition, keep the mortgage payment low enough so that you continue to have funds available to save and invest. Your current and future financial security and goals should not be jeopardized because you bought a home that was more expensive than you could comfortably afford.
Use a Mortgage Calculator
You can see that there are numerous moving parts to consider when you determine what monthly mortgage payment and loan amount are affordable for you. A smart idea is to utilize an online mortgage calculator to assist with the estimations. Keep in mind that some calculators take into account home insurance, taxes and HOA dues, and others do not. Regardless of the calculator that you use, ensure that you take into account all relevant figures. You may get interest rate and term quotes from a few mortgage brokers or lenders for different loan options, and you can use the online calculators to crunch numbers for various scenarios.
Deciding which home to purchase and how much money you should spend on a new home are serious steps to take. These are factors that may live with you until you refinance your mortgage or sell the home, and these events may not occur for many years. As important as it is to find a house that perfectly meets all of your needs and that will grow with you over the years, it is equally important to find a home that is affordable for you to purchase and to live in. As you get closer to making a decision about which home to purchase, devote ample time to each of these tips to ensure that you make a smart financial decision.