When deciding how much they can realistically afford to spend on a home, many potential buyers turn to plugging their current debts, salary, and other fixed expenses into an equation that calculates the number of thousands of dollars they can supposedly afford to spend on a home. A simple recommendation made by many resources is to multiple a buyer's monthly salary by 0.28 to arrive at the amount that person can afford to put towards a mortgage each month.
While this type of calculation can come in handy if you have no idea where to begin in terms of housing prices, it's a mistake to rely entirely on calculations such as these when deciding how much house you can afford. There are other factors you should take into account, such as:
Do you anticipate any other major expenses in the next couple of years?
If you buy a home that eats up 28% of your salary each month, you might have enough to pay all of your bills right now. However, if you acquire additional expenses, such as a new car payment or tuition for your child's new school, you might not have enough wiggle room in your budget to make ends meet. Write down any added monthly expenses that you think might creep up in the next few years, and make sure you take these into account when deciding how much you can afford to put towards a mortgage each month.
How much are property and school taxes in your area?
Property taxes might cost you just a hundred dollars a month in one state, but thousands in another. Take this into account when you calculate your possible mortgage payments. In an area where taxes are high, you'll be able to afford a lot less house than in a low-tax area.
Do you already have a comfortable emergency fund?
It's important to have 3 – 6 months' expenses saved up in an emergency fund so that you don't have to turn to your credit cards when an emergency expense comes up. If you don't already have these funds, you may wish to spend less on a house so you can put the extra cash towards an emergency fund. On the other hand, if you already have plenty of savings, you can safely allocate a larger percentage of your salary to your mortgage without worrying that you won't have the extra cash when you total your car or your computer crashes.
For some people, the common recommendation of allocating one quarter to one third of monthly income to a mortgage is spot-on. However, this should be looked at as a general guideline, rather than a rule. If you need to save for an emergency fund, live in a high tax area, or think you may have increased monthly expenses in coming years, you're better off being more conservative with your purchase. You can always move to a larger, more expensive home in the future when you can really afford it more comfortably.
To learn more, contact a company like Thousand Islands Realty with any questions you have.