The idea of owning a home will capture your imagination at one point, if it hasn’t already, and for many people it remains a major life and financial milestone. However, is it possible to purchase a home while trying to build an emergency fund, invest in your retirement, or repay your student loans at the same time? Is it something that you can afford right now?
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It is still possible to buy a home, even with these other financial setbacks, but you should think about what it means for your long-term lifestyle goals and your pocket. The question you need to answer is “what kind of house can I afford?”, because a mortgage is a big commitment and the impact that mortgage payments can have on your pocketbook should be analyzed and understood.
What they will lend you
Don’t be surprised when you realize how big of a house you’re qualified for, once you start shopping around for mortgage rates. Your mortgage lender might insist that you can afford more than you thought, but you shouldn’t get too excited. There’s a difference between how much you can really afford (based on your individual financial situation) and how much you can afford according to a mortgage calculator.
How to figure out your ideal mortgage rate? Calculate the sum of your potential mortgage payments and the minimum payments you make on all your loans, and then divide the number you get by your gross monthly income. For example, if your gross monthly income is $4,000, and you have a $300 car payment, $500 student loan payment, and a combined $300 on your credit card minimums, then your total debt payments are $1,100, so you can’t afford more than $600 on your mortgage payments.
However, you don’t have to go for the maximum of what your lender can approve. Consider these factors before settling down for a mortgage deal.
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Are you comfortable with the payment?
The first thing people do when trying to find out their mortgage is a house affordability calculator. On the Australian Lending Centre website, you can find different types of calculators for calculating different types of loans, which can be very helpful for finding your starting point. Use them cautiously and know that they don’t necessarily fit your payments just because a calculator said so. There might be some room for a higher mortgage payment if you’re comfortable with your current housing costs. Otherwise, you should look for a smaller payment.
One can’t rely on the rule of thumb either, such as 30% of income or 43% of DTI. However, it’s best to base everything on the money you take home. Include every cost there is, like insurance, taxes, utilities, repairs and maintenance (total housing expenses), and you’ll be sure that the number you get is the one that will allow you to breathe more freely.
What about the added costs of ownership?
When thinking about house affordability, you should ponder all the costs related to owning a home, such as maintenance, repairs (when you rent, the landlord fixes everything that breaks, but this will be your responsibility when you’re a homeowner), and increased utilities (if you want to move to a larger house, the utility costs will be larger as well). Use the 1% rule to estimate potential repair and maintenance costs, as real estate investors use it as a general rule for estimating yearly maintenance and repair costs (one percent of the property value).
Also Read: How To Save Money On Utility Costs
So, if the property is worth $250,000, then the annual maintenance and repair costs are most likely to be around $2,500. When you divide it by 12, then $208 will be the approximate monthly cost (this, of course, doesn’t literally work like that – you can suddenly have to deal with a leaky roof or a flooded basement, but can go years without problems as well).
If you’re not comfortable with setting aside that much money every month, you should probably consider buying a smaller home.
Think about long-term lifestyle expectations
This is a factor that people often tend to forget or exclude. The things you prioritize in life can significantly impact the affordability of your home. Do you plan to start a business? This means taking a risk at some point, so what if you realize that your home is more expensive than you thought you can handle? If you’re married, do you plan to be a single- or a double-income family? If one of you stops working, what seems affordable now may not be affordable in the future. Include these factors when determining the base for your calculations.
Don’t end up in a situation in which you’ll have to tighten up your belt and end up unable to live a good life, because you’ve made some really bad calculations. Your mortgage might hold you back if you want to have money to eat in a restaurant from time to time, or take regular vacations with your family. Look as far ahead as you can in order to make sure that your mortgage won’t interfere with your priorities and goals.
Raul Harman’s is a business consultant from Sydney, Australia. He has masters degree in finance and banking and is currently doing financial consulting for various tech companies. Lately, Raul has been mostly concentrated on start-ups and helping them seek the resources to build their company. Raul is a passionate runner and adventure seeker. Every spare moment he loves to spend in nature. Currently writer for Technivorz, and BizzMarkBlog