Yes, the Federal Reserve raised interest rates, but mortgage rates are still near historic lows. It's a great time to buy if you've been considering a new home!
So, how much house can you afford? This is a tough question, especially for first-time homebuyers. Here are a few important points to consider when setting your house-hunting budget:
Start with your Income & Interest Rate
There are two primary factors that influence how much you should spend: your income and your interest rate. Calculate your income by using your total combined pre-tax annual income. Include commissions, bonuses, overtime, income for both borrowers (if you are co-borrowing), etc.
Here is a good starting point for your house budget: keep your mortgage no more than 5x your annual income. So, if you make $30,000/year, shoot for a mortgage less than $150,000.
The next big factor? Interest rate along with loan term (the length of the loan). Common mortgage loan terms are 30, 20 and 15 years. The interest rate you receive will depend on several factors. Your down payment amount, the loan term, and your debt-to-income (DTI) ratio.
A good DTI ratio is 20% debt to 80% assets, but that could go as high as 40% in some cases. Since determining your interest rate is complex, it's a good idea to seek advice from a licensed real estate agent or mortgage banker.
Factor in Recurring Expenses
Factor in other debt payments when calculating your ideal monthly mortgage payment.
As a general guideline, your total debt payments should be no more than 36% of your income each month. Also include recurring expenses, such as groceries, gym memberships, cell phone plans, etc. And, you'll need to have homeowners insurance, so factor in that monthly cost as well.
One major recurring expense that new homeowners sometimes forget to include is property tax. In most cases this is paid during the year and held in an escrow account. But, you'll need to estimate the total and add it to your mortgage payment. Since property taxes vary based on geography, check with a local banker or real estate agent to get an accurate estimate.
Leave Room to Save
Finally, leave your budget enough room to put some savings aside each month. Remember, your down payment probably impacted your savings significantly. You'll want to start rebuilding that rainy day fund as soon as possible.
Buying a home is a complex process and a significant investment, so don't go it alone. Choose a banker and real estate agent to guide you through the process and help you make sound financial decisions.
