What’s the best way to tell if you can afford that home? That’s right — find a mortgage calculator online. But, wait. Are you getting the right answer from that calculator? Worse, do you even have the right information to get that calculator to work for you?
Most mortgage calculators will ask you how much you want to spend on a mortgage. But do you really know that yet? You might be standing in front of your dream house, gaping at the price advertised on the flyer in the front yard. In that case, you may know how much you want to spend.
Is it best to start with the “mortgage amount” when trying to figure out how much home you can really afford?
Sure, you could plug home prices into those home affordability calculators all day long, and then get sticker shock at the monthly mortgage payments provided. Since most calculators make you fill in the interest rate, term and type of loan before you actually know what those are going to be, making it your best guess, instead of accurate information.
Until you actually get a preapproval with a lender, it’s all about your best guess. While it might be an estimate until you’re ready to shop, it doesn’t have to be a shot in the dark. Let’s unpack the steps for getting to a reasonable estimate.
Analyze Your Budget
If you don’t have a formalized budget, it’s probably time to get one when you’re getting ready to shop for a house. You don’t have to be a spreadsheet wizard. There are plenty of sites that can help you track your income and expenditures, such as Mint. They’ll also do some smart categorization for you so you can figure out what you spend the most money on. This could help you identify areas where you might be able to cut back and supercharge your savings potential.
Start with how much you want to spend on housing. Ideally, most experts agree you don’t want to spend more than about a third of your income on housing. In order to have the most realistic mortgage options, you should keep your total debts, with your mortgage payment included, under 43% of your gross income.
Keep an emergency fund and remember that you don’t have to budget every last dollar for the house payment and other necessities. You don’t want to have to stop taking vacations or going to the movies just so you can live in a four-bedroom colonial. Life is about having fun, too!
Calculating a House Payment
Be careful with this one! When talking about “housing,” these budget experts assume you’re including the price of your homeowners insurance and taxes. That gives you a lot less than you think for your mortgage. Also, if you don’t initially put 20% down on that home, you’ll need to tack on mortgage insurance on top of that.
Let’s also discuss what your goal mortgage payment should be and what you could afford to spend if you pushed your budget to the max. You might not go this high, but when you get a preapproval, your mortgage company bases the approval amount on the highest monthly payment you can afford.
It’s also good to have low and high-end options because in a competitive market, you may not find a home that fits your family’s needs at your goal price, so you might end up going slightly higher.
How do you come up with a realistic monthly payment? To do that, you should keep one eye on rates. Most mortgage calculators require you to put the rate in yourself, so it will help to know what current rates are. Any public rate is based on the assumption that a lender will publish. In reality, the rate is different based on your personal financial profile.
Public rates are a good baseline for estimation purposes, but the factors that go into your rate include income, assets and credit as well as your down payment size.
The other thing to consider is how long you want to spend paying off the loan. Choosing a loan with a longer term means a lower payment, but you’ll have to pay more interest over time. Flip that for loans with shorter terms.
If you get some extra money because you take out a loan with a longer term, you can make payments directly to the principal, which helps pay it off quicker and lower the interest.
Since it’s an estimate and you’re ballparking things, it’s important to realize that any of these numbers could change. Don’t get your heart set on any one figure, but a mortgage calculator can give you a place to start.
If you think you’re almost ready to buy a home, you could get a preapproval online through Rocket Mortgage by Quicken Loans. Otherwise, you can give one of our Home Loan Experts a call at (888) 980-6716. If you have any questions, you can leave them for us in the comments below.
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