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How Much House Can You Afford?
For prospective homeowners, a common question is “How much house can I afford?” Buying a home is typically a lifelong expense, and knowing how much you can afford will help narrow your search when it comes time to look for a home. But before you start thinking about houses, it’s important that you know where you stand–financially speaking. Start by asking yourself these three questions.
1. How Much Mortgage Can I Afford?
Before you start thinking about homes, ask yourself how much you’re able to allocate to mortgage payments every month. Knowing how much you have going in and going out every month will help you know how much house you can—and can’t—afford.
2. How Much Should I Put Down?
How much you’re able to put down will help determine how much lenders are willing to offer. Most lenders require down payments between 5-20% of your home’s overall price, but depending on the size, scope and type of loan you’re choosing, prices vary. According to most lenders, putting down 20% will help you snag a proper mortgage.
3. How Much Can I Pay Per Month?
In order to calculate how much you’re able to pay per month, check your debt-to-income ratio. Take a look at how much you make vs how much is going out. In other words, look at your monthly income vs the debts you owe. A good rule of thumb is to never agree to payments that are more than 25% of your salary. So if you make $40,000 a year, try to limit your monthly payments to one quarter of that, or no more than $950 a month.
Use this calculator to help get a better idea of how much home you can afford.
While it’s important to budget for your monthly payments, remember that there may be other fees as well. Fees like homeowners insurance are common, and can easily cost over $200 a month. Properly budgeting will help you stay within your limits, and it will help you pay off your home and build equity faster.
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