Critical considerations when deciding how much house you can afford

When you contemplate buying a home, one of the more important considerations is determining how much you can afford to pay. It’s a complicated question.

Virtually every real estate or mortgage company website offers a calculator to help you figure out how much you should be able to spend on a home. These are great tools, but the number they provide is a guide, not an absolute.

Financial guru Dave Ramsey explains, “how much house you can afford is as unique as you are and is based on many factors — your location, income, savings, personal preferences, and most importantly, the house-buying plan you have in place.”

According to Ramsey, “you want your new home to be a blessing, not a curse. If you buy a house with nothing down and a huge monthly payment, you’re inviting Murphy to move into the spare bedroom. That means everything that can go wrong will go wrong.”

Here are some things to understand to help you make a good decision.

Mortgage lenders will look at your credit score,  income, expenses and debt to generate a number of how much you can borrow for a home loan. Just because a bank says you qualify for a $350,000 mortgage does not mean you should spend that much on a house. For most buyers, a more important number is the monthly mortgage payment amount.

Figuring a down payment

The current mortgage system began in 1934, according to Investopedia.com. The government wanted a plan to increase home affordability to help overcome the Great Depression. Prior to that time, most home purchases required a 50 percent down payment. Today, through agencies such as the Federal Housing Administration, down payments can be as little as 3.5 percent.

Down payments of less than 20 percent usually require that the buyer purchase mortgage insurance, which protects the lender if the buyer defaults. Mortgage insurance can add hundreds of dollars to each monthly payment. While paying a big down payment is nice, buyers should also leave themselves some extra cash to deal with unexpected expenses that arise with nearly every home purchase.

Determining monthly payment affordability

When deciding how much you can pay each month, keep in mind that financial circumstances can change quickly and unexpectedly. People lose jobs, vehicles break down, babies come along, people get hurt or sick, etc. A good guideline is to keep your monthly mortgage payment to about two-thirds of the maximum you think you can afford.

Understanding mortgages

Mortgage payments usually consist of interest, principal and escrow (money that goes toward taxes and insurance). A higher interest rate will increase your monthly payment and reduce the amount you can spend on a home. For example, if you get a 4 percent interest rate on a $200,000 home loan, the monthly payment will be about $995. If the interest rate is 6 percent, the monthly payment jumps to about $1,200.

There are other considerations. A 15-year mortgage instead of 30 will likely increase your monthly payment by about 50 percent, but you only pay half as long. An adjustable rate mortgage can give you a lower interest rate, meaning your monthly payment could be significantly less; however, that monthly amount will go up if interest rates rise. If you plan to own a home for only five or six years, though, it might make sense.

Assessing the home

The condition of the home you buy is important. A house that needs repairs and renovations could end up costing more in the long run than a pricier home in pristine condition. Always have an expert inspect any home before you buy. Realtor.com notes that home inspections provide an extra level of security and increase buyer confidence.

Finding a trustworthy ally

The mortgage banker you choose for financing  plays an important role.  Knowing when the rates fluctuate becomes an important part of the buying process.  In the mortgage industry, this is called Purchase Power.  An experienced banker makes the process simpler and easier to understand.

If you’re looking for the home of your dreams, finding a  mortgage company with the expertise can help you qualify for a home you can afford.

As a Mesa native, Ron grew up in the valley and then studied Business and Finance at Western International University. After climbing the corporate ladder with a local semi-conductor company and working as the National Sales Manager for over 10 years, he branched out to an industry familiar to the Duranti family for over 35 years… Real Estate. Ron found his niche in the Mortgage Business, and was welcomed into the Peoples Mortgage family in 2000 where his straightforward and honest approach with his clients and colleagues earned him the title of partner by 2003. He can be reached at 480.694.2552 or by email: RDuranti@peoplesmortgage.com

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