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Your home may likely be the biggest purchase in your lifetime, so knowing how much you can afford is one of the best steps to consider when buying a home. The good news is that figuring all these is quite easy and not too demanding – especially when you use a mortgage calculator.
- First, you need to know how much you earn monthly. Ensure you include all sources of income from investment profits and even rental earnings.
- Second, you have to list the housing costs and the down payment for the home. This includes insurance costs, property tax, and the loan terms (how long you want to pay off your mortgage). The most popular option is 30 years. However, most people choose a shorter loan option.
- Lastly, balance up your expenses. This is the amount that goes out of your pocket monthly. You must ensure that all the information you provide is accurate, as this will help you know the type of home you can afford.
Once all is set, you can use a mortgage calculator to estimate how much mortgage you can afford.
The 28/36% Rule
Using all your income to buy a home is a free bus ticket to financial problems. It is necessary to ensure you have enough space in your budget list for unforeseen circumstances, emergencies, and retirement savings.
To know how much mortgage you can afford, financial experts recommend that you do not spend more than 28% of your gross income on housing costs and no more than 36% on debt, including housing and student loans, credit card payments, and car expenses. The 28/36 percent rule is the proven home affordability rule that sets a foundation for what you can pay each month.
Here’s an example of how to use the 28/36% rule
To calculate 28% of your income, you multiply 28 by your monthly income. If your monthly income is $10,000, then you multiply by 28. That is, 10,000 x 28 = 280,000. Then, you divide that total by 100. That is, 280,000 / 100 = 2,800.
Depending on your location, your annual income may be more than sufficient to cover your mortgage or not. Knowing how much mortgage you can afford will help you make excellent financial decisions quickly. The last thing you want to do is take a 30-year home loan that is way beyond your budget.
Why You Should Consider Buying a Home Below Your Budget
Like I’ve said above, when buying a home, you shouldn’t max out your income. If you look at homes with prices below your budget, you’ll have more options to consider. One, you have the room to bid if you end up competing with someone else. Again, you have more than enough money to upgrade your home. A little upgrade can transform your home into a castle without breaking the bank.
How To Get A Mouth-watering Interest Rate
Getting a mortgage with a low-interest rate can save you a fortune. So, it makes much sense to try your best to get your home’s lowest interest rate. To get a low-interest rate, you must have a high credit score, low debt, and a substantial down payment.
It is also important to know that borrowers with FICO scores close to or at 800 will get better interest rates.
Buying a home needs thorough planning and preparation. Once you’ve done your homework, you can begin the homebuying process. Take the bold step and enjoy your adventure.