How Much House Can I Afford?

Home ownership is one of the most important decisions anyone will make in his or her lifetime. Making the wrong decision when it comes to purchasing a house can have dire immediate consequences as well as dire long-term consequences. Homeowners should put in as much effort as possible when they’re trying to determine whether or not a particular home is going to be affordable for them.

Basic Guidelines

People should not buy a house that’s worth more than two and a half times what they earn every year. For instance, someone making forty thousand dollars per year can purchase a house that’s worth one hundred thousand dollars, but not a house that’s significantly more expensive. For people that have somewhat unstable income sources, this equation is going to be more challenging. They may want to avoid purchasing a house that’s worth more than twice of what they earn, just to be on the safe side.

Homeowners will also have to take into account the fact that a house is a highly uncertain investment. Shifts in the real estate market can make it tricky for people to predict how much their homes are ultimately going to be worth when and if it is ever time to sell them.

Homeowners should also take into account the condition of a home before purchasing it, knowing that household repairs can cost a lot of money. Some people purchase an affordable home, only to find that the home will cost them thousands of dollars more by the time they are finished fixing it. Home inspector reports and careful research can help prospective homeowners make informed decisions in that regard.

Home Ownership and Debt to Equity Ratios

People shouldn’t just consider the value of their prospective homes and their personal levels of income when they’re deciding whether or not they can afford a given house. They need to take into account their other debts. Plenty of people today are earning high incomes, but they are still struggling to pay their student loans, credit card bills, or high levels of medical debt.

For individuals with children, this situation is particularly complicated. Having a large number of dependents can cause high unexpected expenses down the line. Parents may end up caring for their children for longer than they expected, and they may have to absorb unexpected medical or educational expenses. However, some parents may have to buy larger and more valuable houses for the sake of their growing families, which is only going to complicate their decision further. Parents should simply exercise as much caution as possible and try to shop around for the best deals.

People need to calculate their debt to equity ratios before they can truly come close to evaluating their financial situations. Ultimately, this process involves dividing one’s monthly debt payments by one’s month income, but the situation is going to be more complicated for people that have fluctuating incomes or high levels of debt. Prospective homeowners will need to add up all of their monthly expenses.

If they receive bonuses or additional sources of income throughout the year on an inconsistent basis, they should simply divide those amounts by twelve in order to add them into their income streams. Once the sum of all of their debts and the sum of all of their income sources have been found, homeowners can make the final calculation, which will give them an idea of what home they can truly afford.

Loan Years and Common Types of Mortgage Rates

The mortgage rate that people can get on their homes is also going to ultimately affect the affordability of those homes. Many people choose to have a fixed-rate home loan. Individuals that want to pay back their mortgage loans slowly but surely will choose a fixed-rate loan, which is an option that is almost always on the table.

Many people choose a thirty-year fixed-rate home loan in order to get the superlatively low regular payments, but these people will have to work out their long-term plans before they commit to something like that. Individuals that are locked into these sorts of loans will have a harder time getting the money together if they are forced to sell a house earlier than they would have expected, since they will have paid off less of their loan than someone with a different loan type.

Most of what people pay off during their early days on a fixed-rate home loan is going to be the interest. However, the interest rate never changes, so the monthly payments will be predictable. People that are in a stable living situation with a steady and reliable income stream may be advised to go for the fixed-rate home loan. Fixed-rate home loans can also be paid off over the course of ten or fifteen years.

People that opt for that loan type are going to be paying more money each month, but they’ll also manage to pay off the loan even faster. Individuals that are earning relatively high levels of income and who want to keep their options open in the future may want to opt for mortgage loans with these types of loan years.

Other homeowners opt for adjustable-rate mortgages, which will potentially allow them to pay off their debt more quickly. However, homeowners will end up paying higher interest rates down the line, and future changes in their financial situations can leave them unprepared for these higher interest rates.

It is possible to get a loan that is essentially a combination of an adjustable-rate mortgage and a fixed-rate mortgage, as counter-intuitive as that may initially appear. It’s possible to pay off mortgages like this in as little as three years, which helps explain their popularity. Basically, the loan has a fixed rate at first, and a rate that changes every year after a certain amount of predetermined time has gone by.

The initial fixed-rate period will allow people to get settled and established, while the adjustable rate will cause their payments to vary. Loans that combine the principles of fixed-rate loans and adjustable-rate loans will rarely last more than a decade. People that are trying to estimate whether or not they can afford their homes in the long term will need to take into account potentially varying interest rates, and the fact that the value of a home simply doesn’t tell the whole story, regardless of the loan type a homeowner chooses.

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