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How Much Can You Afford Calculators.
Here is the one we use, its very extensive and thorough even with Amortization Chart, Tables and even includes Land Transfer Tax, Cash needed, and Monthly expenses while a the same time compairing diffrent rate scenarios.
Right At Home Mortgage Calculator Link
Here is one of my favorite for site for calculating the money side of purchasing a home. Very vesual and filled with tools. Affordability, Amortization, Charts, Rent VS. Own and more. > CANADA MORTGAGE <
Some say the definitive site when it comes to home ownership, mortgage information and buying a home is CANADA MORTGAGE AND HOUSING CORPORATION or (CMHC)
How much house can I afford?
Buying a new home should be exciting but it should also provide you with a sense of stability and financial security. The wrong kind of excitement is living month to month, with barely enough income to meet all of your obligations, the threat of foreclosure looming if you slip up. That’s why it’s so important that you know ahead of time the answer to that very important question, How much house can I afford?
The 36% Rule: The Original Mortgage Affordability Calculator
In order to avoid the nightmare scenario of buying a house that breaks the bank, you’ll need to figure out a housing budget that makes sense for you. When determining How much house can I afford? one rule of thumb to follow is the 36% rule. The 36% rule says that your total debt payments should never add up to more than 36% of your gross (i.e. pre-tax) income. In practice, that means that for every pre-tax dollar you earn each month, you should dedicate no more than 36 cents to paying off your mortgage, student loans, credit card debt and so on. (Side note: since property tax and insurance payments are required to keep your house in good standing, those are both considered debt payments in this context.)
This is more a rule of thumb than a strict limit, but most banks don’t like to make loans to borrowers with bad debt-to-income ratios. Although it’s possible to find lenders willing to do so (often at higher interest rates), the thinking behind the rule is instructive. If you are spending 40% or more of your pre-tax income on pre-existing obligations, a relatively minor shift in your income or expenses could wreak havoc on your budget. Banks don’t like to lend to borrowers who have a low margin of error. That’s why your pre-existing debt will affect how much home you qualify for when it comes to securing a mortgage.
But it isn’t only in your lender’s interest to keep this rule in mind when looking for a house; it’s in yours too. Since lenders tend to charge higher interest rates to borrowers who break the 36% rule, you’ll probably end up spending more on interest if you go for a house that places you beyond that limit. Furthermore, while the difference between the house that eats up 45% of your monthly income and one that only takes 35% is likely not huge, that extra 10% of income can be critical if your financial situation changes (like say your utility payments rise or gas prices skyrocket). With something as important as a house, it’s nice to have a bit of a cushion for when things go wrong.
The Down Payment and the Cash Reserve
Another key number in determining the answer to How much house can I afford? is your down payment. The larger the down payment; the larger the house, right? Well, yes, but before you go and empty out your savings account, keep in mind that lenders generally want you to have a cash reserve remaining after you’ve moved in. Why? Having some money in the bank after you buy is a great way to help ensure that you don’t find yourself worrying about the two dirty words in homeownership: default and foreclosure. The question isn’t just Can I afford a house? It’s Can I afford a house and still have some money left over as a buffer?
While maintaining a debt-to-income ratio under 36% protects you from minor changes in your finances, a cash reserve protects against major ones. At a minimum, it’s a good idea to be able to make three months’ worth of housing payments out of your reserve, but something like six months would be even better. That way, if you experience a loss of income and need to find a new job, or if you decide to sell your house, you have plenty of time to do so without missing any payments (and, in turn, wrecking your credit).
Think of your cash reserve as the braking distance you leave yourself on the highway—if there’s an accident up ahead, you want to have enough time to slow down, get off to the side or otherwise avoid disaster. A good home affordability calculator (like ours!) will make sure you have this cash reserve at the end of the homebuying process.
How Much Home Can I Afford? The Housing Match Game
So now we have two guidelines that can help you figure out the answer to How much house can I afford? The first is the 36% rule, which says that your debt-to-income ratio should stay under 36%; that is, your total debt payments, including your housing payment, should never be more than 36% of your income. The second regards your cash reserve: you should always try to keep at least three months’ worth of payments in the bank in case of an emergency. That all sounds great in theory, but how does it play out in the real world? To demonstrate that, let’s take a look at a few hypothetical homebuyers and some hypothetical houses to see who can afford what. It’s… the Housing Match Game!!
THE CONTESTANTS
AgesMonthly IncomeMonthly Debt PaymentsSavings
Peter & Sally C.40, 39$3,500$250$10,000
Mary P.29$7,250$500$40,000
Mark Z.84$40,000none$185,000
House #1 is a 1930s-era three-bedroom ranch in Ann Arbor, Michigan. This 831 square-foot beauty has a wonderful backyard, and includes a two-car garage. While the interior needs some love, the house is a deal at a listing price of just $135,000. So who can afford this house? Peter & Sally C., Mary P. and Mark Z.
Analysis: All three of our homebuyers can afford this one. For Mary P. and Mark Z., who can both afford a 20% down payment (and then some), the monthly payment will be around $800, well within their respective budgets. The math is a little trickier for Peter and Sally, but it still works out. They can afford to make a down payment of $7,000, just over 5% of the home value, which means they’ll need a mortgage of about $128,000. In Ann Arbor, their mortgage, tax and insurance payments will be around $950 dollars a month. That, combined with their debt payments, adds up to $1,200 – or around 34% of their income.
House #2 is a 2,100 square-foot architectural masterpiece in San Jose, California. Built in 1941, it sits on a 10,000 square-foot lot, and has three bedrooms and two bathrooms. It’s listed for $820,000, but could probably be bought for $815,000. So who can afford this house? Mark Z.
Analysis: While this one’s a little outside of our other homebuyers’ price range, Mark Z. can make it happen. Using the 36% rule, Mark’s monthly housing budget is around $14,000. The mortgage, property tax and insurance on this property will total somewhere around $4,100 – so he could actually afford to pay more on a monthly basis. For a house this expensive, lenders require a larger down payment—20% of the home value—so Mark Z. is limited to a house worth five times his savings (minus that cash reserve equaling three months’ payments).
House #3 is a two-story brick cottage in Houston, Texas. With four bedrooms and three baths, this 3,000 square-foot gem is the perfect place to raise a family. And it only costs $300,000! So who can afford this house? Mary P. and Mark Z.
Analysis: Mark Z. can easily afford this place, but for Mary P. it’s a closer call. Assuming she makes a down payment of $27,300, or just under 10%, her monthly housing payments will be $2,110. Add in the $500 student loan payments she’s making each month, and you’ve got total debt payments of $2,610, which is exactly 36% of her income. Plus, even after she pays her down payment and all the closing costs, she’ll have around $7,800 left in savings, enough for four months’ worth of housing payments.
Can I afford a house? vs. Should I buy a house?
In our game, even though Mark Z. can technically afford House #2 and Mary P. can technically afford House #3, both of them may decide not to. If Mark Z. waits another year to buy, he can use some of his high income to save for a larger down payment. Mary P. may want to find a slightly cheaper home so she’s not right at that maximum of paying 36% of her pre-tax income toward debt.
The problem is that some people believe the answer to How much house can I afford with my salary? is the same as the answer to What size mortgage do I qualify for? What a bank (or other lender) is willing to lend you is definitely important to know as you begin house hunting. But ultimately, you have to live with that decision. You have to make the mortgage payments each month and live on the remainder of your income.
So that means you’ve got to do some homework (sorry!). The factors you should be looking at include those about your personal financial situation (income, credit rating, existing debt, down payment and savings) and external factors (mortgage term, current interest rates, private mortgage insurance and the local real estate market). Plugging all of these relevant numbers into a home affordability calculator (like the one above – check it out!) can help you determine the answer to How much home can I afford? (It helped Peter & Sally C., Mary P. and Mark Z.) But beyond that you’ve got to think about your lifestyle- like how much money that leaves you for travel, other financial goals, etc. You might find that you don’t want to buy the most expensive home you can afford.
Some Home Affordability Advice
After all, there is something to be said for the idea of not maxing out your credit possibilities. Here’s some advice for Mary – and the rest of us. If you look at houses that are priced somewhere below your maximum, you leave yourself some options. For one, you will have room to bid if you end up competing with another buyer for the house. As another alternative, you will have money left over for renovations and upgrades just in case the house needs a little work in order to fully transform into your dream home.
Perhaps more importantly, however, you avoid putting yourself at the limits of your financial resources if you choose a house with a price lower than your maximum. You will have an easier time making your payments, or (better yet!) you will be able to pay extra on the principal and save yourself money by paying off your mortgage early.
Reasons to Postpone a Home Purchase
Along the same lines of thinking, you might consider holding off on buying the house. This advice goes for Mark, but it could apply to any of us. The bigger the down payment you can bring to the table, the smaller the loan you will have to pay interest on. In the long run, the largest portion of the price you pay for a house is typically the interest on the loan. In the case of a 30-year mortgage (depending, of course, on the interest rate) the loan’s interest can add up to three or four times the listed price of the house (yes, you read that right!). For the first ten years of a 30-year mortgage, you could be paying almost solely on the interest and hardly making a dent in the principal on your loan.
That’s why it can make a significant difference if you make even small extra payments toward the principal, or start with a bigger down payment (which of course translates into a smaller loan). If you can afford a 15-year mortgage rather than a 30-year mortgage, your monthly payments will be higher, but your overall cost will be drastically lower because you won’t be paying nearly so much interest.
That sounds great, but it’s not always the best option either. If the 15-year mortgage puts you uncomfortably close to your maximum—meaning you won’t have any room in your budget for emergencies or extras—you could always lock into a 30-year mortgage while making a commitment to yourself to make payments the size of the 15-year plan unless there’s a financial emergency. If you go with this plan it’s important to make sure your mortgage terms do NOT include a penalty for paying off the loan early. This is known as a pre-payment penalty and lenders are required to disclose it.
So, should I buy a home?
When it comes to answering the question of How much house can I afford?, it’s important to remember that the mortgage lender is only telling you that you can buy a house, not necessarily that you should. Only you can decide whether you should make that purchase.
Resource: smartasset