When planning for the purchase of a home, one of the first steps is deciding just how much you can afford. This can be a very difficult task, but the Equifax Finance blog offers a few tips for finding the answer in their new article “What Kind of Mortgage Can You Afford?”
The first piece of advice is to assess your priorities in your new home. What really matters most to you? And here’s the kicker — not what you think you want, but what is really important. The article describes the “drive-‘til-you-qualify” trap that many buyers fall into: driving farther and farther out into the suburbs to find the largest home they can afford. The perception is that the bigger house will bring more happiness with its large yard, bigger closets, lower mortgage payment, etc. But the reality may be that rising gas prices cancel out all those savings. You spend hours every day in your car instead of spending it with family.
The next step is then to think about quality of life. Isn’t spending more time with friends and family more important than spending time in your car? What would you do with extra hour you’d have every day if you didn’t have to spend it on your commute? And what features and amenities do you really need? Will you actually use that big yard or spare bedroom?
Lastly, decide how much of your income you can devote to housing. The traditional ratio is one-third of after-tax monthly income should go to housing. But if you live far away from work, don’t forget that transportation costs must also be included (gas, maintenance, parking, tolls, etc.) in your budget. The article recommends combining commuting costs and housing and set aside 45 percent of your after-tax income for one large allowance. If you spend less on commuting, you can afford more house; if you have to spend more on commuting, that means less house.
The article also recommends a few online calculators to help understand your expenses. Visit the Equifax Finance blog for these resources and tons more on real estate, finances, credit, taxes, retirement, identity theft insurance and more.