Knowing how much mortgage you can realistically afford is the first step to becoming a responsible homeowner. It makes no sense at all to make all that effort when it comes to secure a property, get mortgage preapproval, hire a real estate agent, haggle to reduce the selling price, and then close the deal only to see your home go into foreclosure because you can’t afford the payments.
So how much should you allocate for your monthly mortgage payment?
The 30% Rule
A cursory search will give various percentages. Some say 25% of the gross monthly income should go to paying your mortgage, others say 40%, which is admittedly a little bit steep. To be fair, let’s keep the percentage around 30% of your gross monthly household income.
Your monthly income is $7,000 or about $84,000 annually, 30% of that is about $2,333 ($7,000 x 0.30).
This amount represents the total payment for your mortgage, and this includes the annual real property taxes and homeowners insurance. At that monthly mortgage, it means you are eligible for a house that’s in the $380,000 to $450,000 range.
As an aside, those who live in states with very low property taxes such as Louisiana, Alabama, South Carolina and Delaware are not exactly better off than those whose real estate taxes are substantial. State governments have to get the money somewhere so you can expect higher income taxes and other peripherals.
Allocate for Maintenance Fees and Repairs
Don’t get too excited about buying that four-bedroom, three-bath, and two-car garage house. You have to consider the maintenance costs and repairs, as well. Remember, this is on top of your monthly mortgage, the bills, groceries, medical expenses and any incidental costs.
Of course, take your savings where you can get them. For instance, you get a house with convenient public transportation. Or if the school or your place of work is near and a walking or biking distance, that can save you a lot of money in turn by avoiding car lease payments.
You may also have to do some belt tightening, and try to limit luxuries. Perhaps keep them to the minimum. That means not eating out all the time, possibly cutting off the cable TV or Internet, and canceling that planned vacation. If you have an extra room in the house, it may be a good idea to rent it out for passive income.
The point is house hunting often involves a lot of compromise. Also, you really need to work with your real estate agent to find a home that’s within the comfortable range of what you can afford monthly based on your earnings. Don’t buy a home based on an expected bump in salary because you can’t really predict the future.
So if you are eligible to get a $450,000 house, find a home that’s somewhere between the $380,000 to $400,000 range. That should give you enough wriggling room for the needed repairs and maintenance.