How Much of a Mortgage Can You Afford?
When a new home buyer applies for a home mortgage pre-approval, the amount given as to what the buyer can spend on a home is simply an estimate and may not be a true indicator of what a buyer can actually afford on an on-going basis. There are many factors that affect a buyers home buying ability that are not usually considered in a mortgage application.
Add these eight numbers to your budget, to better determine how much of a mortgage you can reasonably handle on an on-going basis when searching for a home to buy.
Make sure to consult with a lender or financial advisor with any questions you may have about your personal financial situation and how it relates to financing a home.
1. Home Improvements and Upkeep Expenses After the Sale
Once you get settled into your home after closing on your home, you begin to realize that there is a lot of work you must invest to keep the systems of the home running as they should. If you are fairly handy, you can do a lot of upkeep on your own and save money. However, there are certain kinds of jobs that require professional knowledge and experience.
Experts suggest that you set aside a few thousand dollars each year to pay for HVAC services, professional cleaning, landscaping and other maintenance tasks. If you decide you need to start some home improvement projects, you may need a good deal more.
2. Utility Costs, Services and Fees
Every time you move to a new home, you have to set up monthly services. Some, like your mobile phone, can follow you to your new address with the same monthly payment. Others, such as water, sewer and utilities, may vary significantly in price from your old home to the new property. The companies providing the services may be able to tell you in advance average costs for your neighborhood.
If you live in an area that is particularly hot or cold, expect to pay more money in utility costs for heating and cooling. Add in elective services like satellite and Internet to your monthly budget, as well.
3. Emergency Expenses
Some finance experts say that you should keep at least three and preferably six months of expenses in reserve for emergencies. Saving money is difficult for many people, while socking away such reserves for emergencies may be even more difficult. Some buyers decide to tap into their long-term savings to pay the down payment and/or closing costs on the home. However, it's best to use money that has been put aside only for emergency use.
4. Regular Non-Debt Obligations
There are many monthly expenses that need to be taken into account that are often left out of monthly budgets. Daycare and medical expenses are two common examples. Child care, especially for children too young for school, is usually quite expensive, and is often not taken into account when looking at mortgage and home affordability.
Additionally, healthcare costs for insurance premiums, out-of-pocket costs and deductibles should also be considered in monthly household expenses.
5. Predicted Changes in Income
When you apply for a mortgage, your lender looks at your credit and income history. It is typically assumed that you will continue to make the same household income or more for the duration of the loan. This may not be true for everyone.
- change industries
- quit a job or shift to part-time work
- start a business with inconsistent income
- stay home to care for a member of the household
All of these scenarios could potentially affect your future income. If you expect a significant decrease in your income in the next few years, you should estimate the difference in expected income and make sure that all of your obligations can still be met. If not, you may need to reconsider your future plans or type of loan.
6. Transportation Costs
For many, commuting to work is a big part of their day-to-day activity whether it is under 15 minutes or over an hour. If you are driving, then typically, longer commutes put more mileage on a car and may age it faster than normal - unless you pay for a public transit pass, which may also have a recurring fee of its own. Also plan in your budget for additional gasoline costs, with more frequent oil changes and maintenance. If you put off buying a car until after you get into a home, you should also factor in the monthly payment on a new car to your budget.
7. Interest Rate Changes
Although mortgage interest rates have remained very low for several years now, circumstances are likely to change over time. If you do not lock in a fixed rate for your mortgage, your monthly payment may fluctuate based on changes in the market. Any potential fluctuations should be accounted for when calculating what you can afford if you choose to not go with a fixed rate mortgage.
An adjustable-rate mortgage (ARM) has a fixed rate for an initial term, often five years. Afterward, the rate may go up or down every six months or a year, depending on the terms of the loan. If the initial term only required you to pay interest on the loan, you could notice an increase of hundreds of dollars a month once you add in principal payments.
8. Tax Considerations
Fortunately, certain tax consideration affect buying a home in a positive way. Some, like the home mortgage interest deduction, could possibly decrease the amount of taxes you owe each year. If your mortgage is secured by your home, you can likely claim all the interest you pay on it as a tax deduction this year. Though always be sure and check with a tax or financial expert first.
The amount of money you qualify to receive in a mortgage loan does not always tell you how much you can afford. With these additional considerations, you can create a budget that truly reflects your household’s financial needs.