How Much House Can I Afford?
As home prices go up, many people are getting priced out of the market. More and more people are buying houses that are stretching their budgets. So, how much of a house is too much? There are many different rules of thumbs from other financial advisors, including:
For example, if you make $60,000, the simple test (2.5 to 3.5 times your annual pay) says that you could afford a house between $150,000 to $210,000.
Note that the mortgage of $953 (19% of gross income) is comfortably below the upper limit of 28% of pre-tax income. If you were to assume a mortgage equal to 28% of your pre-tax income, you could buy a $270,000 house, or 4.5 times your income of $60,000, in this example. However, if you push your mortgage to 28% of your income, there will be little or no room for other things like saving for retirement and tithing. Rules of thumbs are just general guidelines (and sometimes the maximum); every situation is different and must be considered individually. For example, using an average budget:
As you can see, even before tithing, savings and entertainment/vacation fund, the budget is getting really tight with the mortgage being 28% of pre-taxable income. By pushing the limits, it's no wonder the average savings rate in America has decreased significantly over the last 10 to 15 years. The emphasis of spending has been on the home mortgage with little being saved for a rainy day or retirement.
Of course, each individual is different. Some city residents spend less on transportation but may spend more on food , cab rides, and eating out. Thus, before buying a home, you should determine your own budget to make sure you are not getting in over your head. Unfortunately for some, the housing frenzy has made them rush out to buy a house before considering the consequences of their actions. Now, with the spike in gasoline prices and health care prices, they have no room in their budget to adsorb these increases.
In addition, there are additional costs when buying a home that some people do not budget for, including:
So, the morale of the story is to determine your budget with your new mortgage before buying the house and make sure there is wiggle room in case of an unforeseen emergency.
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