The Curious Homebuyer: Figure Out What You Can Afford

FIGURE OUT WHAT YOU CAN AFFORD

Finding out what you can afford might seem like a straightforward exercise, but so many home buyers get this wrong. It doesn’t help that you’ll get a range of different answers depending on which online calculator you use.

True affordability isn’t about figuring out how much you can afford to buy. It’s about how much you can afford to maintain over time. So here are 5 things to consider when trying to figure out a comfortable amount you should spend on a house.

1. First, put down your basic numbers.

There are a couple big numbers that matter, and any online calculator will ask you for them. What’s your total household annual income? Do you have any recurring monthly debts (student loans, car payments, etc.)? How much do you have in savings that could be applied towards a down payment?

2. What’s going on in your life right now?

Are you about to have kids? Do you hope to go back to school? Will you be taking a break to care for an ailing parent in the near future? There are many factors that can influence your cash flow that aren’t technically part of your current expenses right now. For instance, if you are thinking of having children, you should do the math on what childcare will cost you and factor that into your thinking. Let’s say you hope to have three kids. Assuming you space them roughly 18 months apart, you may need an additional $3,000 per month set aside for childcare — for the next eight years. That would be a hugely important potential expense to take into account when looking at homes.

3. Is your income likely to change in the next ten years?

Depending on the type of career you have, your income profile may change dramatically over the coming years. For instance, medical students spend many years earning relatively little, but once they become full-fledged doctors, their income takes a sudden and dramatic leap. Some professional careers are more “slow and steady” and can expect modest increases over time. Some careers hit a threshold that they will simply never pass. Or, you might be a freelancer with a decent but highly variable monthly income. This is important to know when considering a home price and mortgage that would best optimize your income earning potential over time.

4. Other life goals that get you excited.

Maybe you’ve dreamed of taking a year off work to travel the world with your better half. Maybe you hope to retire by fifty. Or maybe you’ve got your heart set on sending your kids to an Ivy League school. Whatever the goals, make sure you’re accounting for them now. And it’s not just about making sure you’ve got enough wiggle room to save for them. In the case of travelling the world for a year, for instance, you may want to invest in a house that would be easy to rent while you’re gone. Or if you’re all about the Ivy League, then you probably want to buy near the best public schools. The point is that your house can actually play an indirect or direct role in helping you achieve your other dreams – but only if you factor them in early.

5. What is your tolerance for risk?

You should always make sure you’ve got about 6 months worth of living expenses saved up in case things in your life start going pear-shaped for a while. It’s hard to imagine, but things do go wrong, even for the best of us. Death, divorce, unemployment, and illness are all things that can suddenly compromise your ability to pay a mortgage. That said, some people feel comfortable with just a couple of months worth of living expenses saved up, while others love knowing they could get by for a year or more if things went really wrong. So ask yourself what kind of emotional security you’d want to have and ensure you’ve set aside enough money to allow you to breathe easy.

Finding out what you can afford might seem like a straightforward exercise, but so many home buyers get this wrong. It doesn’t help that you’ll get a range of different answers depending on which online calculator you use.

True affordability isn’t about figuring out how much you can afford to buy. It’s about how much you can afford to maintain over time. So here are 5 things to consider when trying to figure out a comfortable amount you should spend on a house.

Provided to you by: doorsteps.com

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