How much house can I afford
The housing market is as hot as it’s ever been right now. Interest rates are low and prices are soaring. We have extra cash on hand and we are ready to buy a new house. The bank is going to tell us what they think we can afford, but can we trust what they have to say? Let’s dig in and see what we really should be spending on our homes so we don’t end up stretching our wallets too thin.
25% of monthly income
The model made famous by Dave Ramsey is the 25% of gross income model. This is the tightest version we will cover in this article and though it leaves the least amount to purchase a home with it does open up other opportunities. Decreasing what you spend on your home each month it will open up your ability to pay down debts and increase your wealth through investing. This is the entire premise of Dave Ramsey’s financial system and is a great way to improve your financial health.
So what exactly is the25% plan? It’s quite simple, whatever you and your spouse bring in each week, after taxes, is what you can afford to spend on a home. This includes mortgage, taxes, and insurance and unless you are a big earner this won’t leave most people with as much as they would like to purchase a home. Of course, there are ways to improve what you can afford we will cover later in this article.
The 28% rule
Very similar to the 25% rule made famous by Dave Ramsey the 28% rule is pretty much self-explanatory. Multiply your monthly gross income by 28% and boom you have your max mortgage payment for the month. Just like the rule above this includes all taxes and insurance. This rule gives you a little more wiggle room for what you can afford for a mortgage payment while still keeping you from overextending yourself.
The 35/45 rule
Just like the other two the 35/45 rule is very similar but will give you a range to stay between. I personally believe this rule can overextend you a bit and may leave you feeling stressed to make your mortgage payment each month. Not a good place to be. For this rule, you take 35% of your net (pre-tax) income and 45% of your gross (post-tax) income to come up with a range to keep your mortgage between. If this is a model you are pursuing make sure you have very little other debt or you may run into trouble.
How to afford more house
Well now that you have done the calculations and believe you are stuck in your current home forever… let’s look at what you can do to help you get into the home of your dreams.
Bigger down payment
The most effective way to lower your monthly mortgage payment is simply by putting more money down. If you are currently renting, hopefully, you have been following a budget and saving for a big down payment! If not it’s never too late to start. Every $1000 you put down lowers your payment by $5 a month. Also once you have 20% equity in your home you will knock off PMI (private mortgage insurance) which can lower your payment by as much as 1.5% or more!
Increase the length of your loan
Most financial guys and gals you hear will shun the 30-year mortgage. The 15-year mortgage has many advantages including lower interest rates but also substantially increases your monthly premiums. If you can purchase a home with a 15-year mortgage and still keep the monthly expenses below 28% it is advantageous to do so. If you can’t stomach the monthly payment, and you’re looking for a quick way to lower your payment, the 30-year mortgage is there for you. With interest rates rising, but still historically low, a 30-year mortgage is a viable option for all home buyers. And with just a few extra payments a year you can easily drop 7-10 years off your mortgage if you stick with it through the life of the loan.
Did you do anything to help lower your monthly payment and get into the home of your dreams? Comment below some tips you used to lower your monthly payment or pay your mortgage off early!
