How Much House Can You Afford?

Owning a house is part of the American dream and one of the best investments you can ever make. However, as with anything else you have to understand how much house you can afford. You don’t want to risk losing that house because you overextend yourself financially. In this article we’ll talk about how to determine how much you can afford and the factors behind that calculation.

The two factors that influence how much house you can afford is how big of a down payment can you muster to put towards the house and how much you can borrow. Let’s start by looking at the down payment.

The bigger the down payment, the lower your total interest will be and potentially the lower the length of the loan. You should always try to put as much money as you can towards the down payment. A trap that many people fall into is taking advantage of “no money down” plans. While this may seem like a dream come true, the amount of interest you are going to pay along with the points you will accumulate on your mortgage will go through the roof. Why? Because a down payment let’s the lender know how serious you are about a property. If you are putting no money down or very little down then that makes you a larger risk. After all, if you can’t afford a down payment then can you really afford monthly house payments for 30 years?

The second factor is how large a loan you can get. Unfortunately, nowadays many lenders will gladly lend money blindly, often lending out way more than a client can comfortably afford to pay back. They aren’t worried, because they have the property they can claim if the client doesn’t pay the money back. You should always aim for the lowest loan amount you can. Don’t be tempted to “upgrade” to a better house if it will cause a financial hardship on you. Remember, owning a home is the American dream – don’t turn it into a financial nightmare.

It cannot be stressed enough that before you think about buying a house to sit down and layout your income and expenditures. Figure out how much you can comfortably afford to spend on house payments per month. All too often people never sit down and work on a budget until it is too late. The time to plan is before making a major purchase, not afterwards. You don’t want to be in a situation where you have a major repair that needs to be done and don’t have enough of a financial cushion to get that repair done.

Also, remember that a house payment is only one of the factors behind owning a home. There is also insurance and taxes to consider. Then there is maintenance on the house and home improvements that you will likely want to do over the life of the house. Depending on where you live, the taxes alone can be a major bite out of your wallet. Be sure to research tax rates and insurance rates for any neighborhood you are thinking about buying into before signing on the dotted line.

Owning a house takes plenty of up-front financial planning, but with the right attitude towards buying a house you can comfortably afford instead of trying to buy the biggest mansion on the block you will be well on your way to achieving your part of the American dream.