If you believe you are ready to buy a home, it’s time to figure out how much home you can afford. There are a few ways to go about this, and some interesting calculators out there.Some of it comes down to how big of a monthly payment you are comfortable with. Some of it comes down to how big of a down payment you can come up with.
Don’t forget some of the other monthly payments that will come along with a real estate purchase. Often you’ll see the acronym PITI: principal (the part of the loan that is your home’s purchase price), interest (the interest you pay on the loan), taxes (real estate taxes), insurance (home insurance). These four things, plus condo fees (also known as HOA dues) if you purchase a condo, will be the main parts of your monthly payment.
Principal (the direct payment of the loan)
Interest (how much you’re paying to borrow the money)'
Taxes (property taxes)
Insurance (homeowner’s insurance)
Also factor in repairs and maintenance, which will come out of your pocket vs. a landlord’s when you own vs. rent. How much you should budget depends on the condition the home is in. When you have the home inspected, if issues arise, find out how much it will cost to fix them. You may be able to negotiate down the purchase price, or you may just need to budget for those fixes (near-term or long-term depending on how immediate the need is).
Finally, keep closing fees in mind: title insurance, lawyer, inspection costs, and any other cash that you must bring to the table to close. Your banker or mortgage broker should be able to help you understand this figure early on in the offer process.
Remember: Banks may approve you for a significantly larger loan than you could comfortably pay down, so just because they are willing to lend you $800,000 doesn't mean you should buy a $1 million dollar home if you aren’t comfortable with the monthly payment relative to your income.
Still wondering how much house you can afford? Try this calculator.