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Are you wondering how much home you can afford?
That's the biggest question most people have when looking to purchase a home.
There are two things to take into consideration when figuring how much you can afford:
Let's explore what this breakdown will look like--and a great tool you can use to make it easier.
Some people make really high salaries, but are terrible at saving any money.
They will qualify for a large house, but the bank will charge them Private Mortgage Insurance (PMI) every month because they didn’t save.
Others have small or modest salaries, but are great savers.
Therefore, they may have a lot of cash on hand, but they will qualify for less of a home because they can’t afford the monthly payment.
Related to how much home you can afford:
In order to get an idea of where you stand starting out, you must start with how much cash you have on hand.
The first thing you have to do is look at how much money you have saved.
Of that total, subtract out 2 to 4 percent for closing costs and your 12-month emergency fund.
Let's review the concept with an example.
Why? Because it gives you literally everything you need before you get to the closing table. So, it's a great resource.
I realize this may not be the same situation for everyone, but I'm throwing out some numbers as an example. I know your home buying and savings numbers will look different.
Let's say you have $100,000 in savings. It costs $2,000 a month for you to live, so multiply that by 12. You need $24,000 set aside for your emergency fund.
Now, that leaves you with $76,000.
Since you need to put down 20% of the purchase price, you can afford around a $300,000 house. I figured that out quickly by taking 10% of $300,000 to get $30,000 and then multiplying by 2 to get 20%.
That means you need to have at least $60,000 to put down on a new home. The extra $16,000 is for closing costs, which, for a $300,000 home, can run anywhere between $6,000 to $12,000 (1% of $300,000 is $3,000-- and closing will range between 2% and 4%).
The extra money left over is there for you to buy furniture, make some repairs, set up the house, move in, and pay extra life expenses that come with buying your house.
You see the full calculation I did using the Advanced Mortgage Calculator by clicking here.
After you run those basic numbers, it is now time to turn and look at the monthly payment. Your monthly payment will be based on your mortgage, your housing insurance, taxes, and any Homeowner's Association (HOA) fees.
If you feel uncomfortable coming up with a number, talk to a mortgage broker. They can run reports that break down your monthly payment for different price points and also show you your closing costs for those price points.
Once you start playing with the numbers, you can start talking about how much you can afford per month. That's where the real home buying fun begins!
Using the suggestions and information provided will help give you a realistic housing budget. It is important that you are honest with yourself when you go home shopping.
All of us would love to live in a million dollar house, but there is no reason why we should go see one when we can’t afford it. If you don’t love the homes in your price range, it never hurts to wait a little longer in order to save more or to increase your monthly income.
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