How Much House Can You Afford?
Sticking with the spreadsheet method, we can plug in the value from your monthly budget above to get a decent idea of what size mortgage you can afford. Select the Mortgage Calculator tab in the spreadsheet below to enter in the following:
1) Monthly mortgage payment: this number comes from your budget’s housing expenses category, but should not include the monthly cost of property tax, HOA, maintenance, or any other housing fees, so make sure to remove them prior to entering this number. Looking around in areas you wish to live, or speaking with a local real estate agent can help you with these figures.
2) Down Payment: this will come from your savings, or any liquid assets you wish to part with. To avoid paying a monthly mortgage insurance, it is recommended that you have at least 20% of the total mortgage you wish to finance, so $20,000 for a $100,000 mortgage and you would finance $80.000.
3) Loan Term: You can get this information from a lender, or online resource, but the traditional terms are 15 and 30 years. The shorter the loan term, the lower the total interest paid over the life of the loan, but the smaller the total mortgage will be as well.
4) Interest Rate: Again , you can speak with a lender to get prequalified (then preapproved if you decide to go forward), or use our resource here(create pop up on same screen) to find out what your interest rate may be. This number depends on your credit history, employment, and other factors.
Example Cost of Buying a Home: 3 Beds | 2 Baths | 2,426 sqft VS Renting a Similar Property
- Purchase Price: $328,400 (Median US House Price Source: Census) || Current tax rate for mortgage: 3.92%
- Closing Fees (3.5% of loan, they include: Transfer Fees, Title Fees, https://www.investopedia.com/terms/c/closingcosts.asp) = $ 11,494
- Home Inspection = $500
- Down Payment ( 20% down avoids PMI): $32,840.00
- Mortgage Payment (interest and Principal): $1,553.00
- HOA ($200), Property Tax (1.65%), Maintenance ($300): $951.55 (951.55x12x30=$342,558)
- Total Monthly Payment: $2,504.55
- Interest paid over life of loan = $230,580.00
Unrecoverable Costs (over the life of the 30 year loan): $11,494 + $500 + $342,558 + $230,580 = $585,132
Unrecoverable Costs of renting a similar property: $2,100 median rent x 12 months x 30 years = $756,000
In this scenario, just based on costs you will not get back – unrecoverable – buying seems to make more financial sense. You will have an opportunity cost of the down payment, as well as the money put into the principal, but there is no guarantee that it would make more in another investment, as historical data is not always a reliable indicator of future returns.
This is all dependent on the area, market, and what terms you qualify for when obtaining a mortgage. It is best to grab the data and compare for the area you are looking in, or speak with a knowledgeable real estate professional who can.