It’s the American Dream to own your own home and while lenders and the government have tried to make it a reality for most individuals and families, it is really up to you to determine whether or not you can afford a mortgage and how much. Here are some tips on things you should consider in order to determine how much of a home loan you can afford.
When figuring out how much mortgage you can afford, a few things should be taken into consideration. They include:
The desired amount of mortgage you would like to take out on a new home
The cost of taxes that is included into the price of the home
The interest rate the bank will charge you for the loan
The term of the mortgage (e.g. 15 year mortgage, 30 year mortgage)
Your total income including salary, investments, etc
Your other expenses (e.g. car payment, car insurance, food, transportation, school costs, etc)
Using the above information, you can usually figure out how much of a mortgage is right for you. It should be noted that there are many resources online that offer mortgage calculators including calculators that can help you figure out just how much mortgage you can afford.
Creating a Budget
Before you shop for homes or apply for a home mortgage, you should seriously consider creating a budget to figure out your current financial situation. Creating a budget helps you view how much total income you receive each month and how you spend it. Creating a budget is simple; just create two columns- one for income and one for expenses. Jot down all your income for the month on one side and total it up and on the other side jot down all your expenses and total it up. Now compare. If your finances are good, you should have much more income than expenses. If they are pretty close, you might have already experienced financial problems and if your expenses outweigh your income, you are most definitely living above your means and should clamp down on spending immediately.
Looking at your current financial health should give you an idea of how much you can spend. If you are able to spend thousands of dollars per month, you probably will be ok with a slight increase in your housing costs, however if you can barely afford your current rent, you might have additional financial problems if you take on a new mortgage.
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