Housing payments are relentless. Month-after-month, monies
are due -- no matter what. When you
make your housing
budget, therefore, think in terms
of monthly obligations.
"What can I afford to spend on housing each
As a homebuyer, it's the most important question you can ask
yourself. And ranges won't do,
either. Find your speciﬁc number.
Once you know your monthly budget, determining whether a
home is "affordable" for you is a
matter of working some basic
mortgage math. You'll need a
mortgage calculator for this step.
First, sum the following three ﬁgures:
1. The home's annual real estate tax bill, divided by 12.
2. The home's estimated annual cost to insure, divided by
Your insurance agent can help determine this number.
3. The home's monthly dues, if an association is present.
Next, subtract this sum from your monthly budget amount and
you're left with your maximum
monthly mortgage payment.
Example: If your budget is $1,500 and the above sum is $400,
you have $1,100 left monthly to
spend on your mortgage.
This next step is tricky.
Using your mortgage calculator, enter your maximum payment
amount (e.g., $1,100), your loan's
expected term (e.g., 30
years), and your expected interest
rate (e.g., 4.750%).
Then, have the calculator solve for "loan size", add to that
your expected downpayment
amount, and -- voila -- you've
found the maximum price you can pay
for a given home while
still remaining within your budget.
How Much Can You Afford 2011 Trulia.com
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Homes are more affordable today than at any time in recorded
history. It's not because home
prices are down, though -- it's
because mortgage rates are.
Low mortgage rates extend a buyer's housing budget farther
falling home prices ever could. But
with mortgage rates changing
every 4 hours on average,
affordability can be short-lived.
Every time mortgage rates change, so does your budgeted
maximum purchase price. And the
changes can be dramatic.
Example: For each 0.125% increase to mortgage rates, your
maximum purchase price must fall by
1.45% to stay "in budget".
Mortgage rates are the
biggest factor in home
affordability. The lower
you can get your mortgage
rate, the more homes that
you will find that meet
your monthly budget.
This is why timing the housing market is foolish. Rising
mortgage rates can quickly erase your savings.
Picking the Proper Mortgage Product to Fit Your Needs
Mortgage rates are a major inﬂuence on your monthly housing
budget, but, they're outside of your control.
Mortgage rates based on the price of mortgage-backed
securities; bonds bought and sold on Wall Street.
You can, however, control with which mortgage product you
ﬁnance your home. And, by making better mortgage
choices, you can avoid
"over-paying" on your home loan, like using a 30-year ﬁxed rate mortgage when a
adjustable rate mortgage is more
Homeowners planning to sell within 7 years, for example,
don't need a 30-year ﬁxed-rate loan. Yet, most will opt for
one anyway, citing "peace of mind".
It's an expensive insurance policy that can hits you
hard in the wallet.
Example: In mid-2011, mortgage rates for the 30-year
ﬁxed-rate mortgage were 130 basis points higher than for
an otherwise identical 5-year ARM,
equal to a 12 percent increase to your monthly mortgage payment.
Take note, though. Adjustable-rate mortgages should not be
used as a means to "afford more home". They're most
suitable for people with a
relocation history and/or ambivalence about higher mortgage rates in the
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