How much house can I afford?
February 9, 2021 12:45 PM Subscribe
My job is contemplating moving me from where I currently live to a place with a much cheaper housing market. On sort of a whim, I checked to see if I could qualify to buy instead of renting (I, historically, have not-great credit, so I wasn't sure it would be possible). Surprisingly, I qualified for a mortgage at what seems a decent interest rate... and now I have to math, which is harder than it looks to me.
I have a rough idea of what the monthly payments would look like if I were to take out a mortgage for the full amount I qualified for, and it's more than I would want to pay (more than I'm paying in rent, now). Given a 30-year interest rate of X and a monthly payment of Y, how can I calculate the Z that would be the total amount financed?
I realize there are other things that impact the amount paid per month - possible PMI, HOA fees, other things - but I'm just trying to ballpark out where that line's going to be. What I'm looking for is something like "if I want my mortgage payment to be $Y/month or less and my interest rate is X%, the maximum amount I can finance is Z (so the most house I can buy is Z plus what I've got for a down payment)".
Online calculators aren't really helping me.
I have a rough idea of what the monthly payments would look like if I were to take out a mortgage for the full amount I qualified for, and it's more than I would want to pay (more than I'm paying in rent, now). Given a 30-year interest rate of X and a monthly payment of Y, how can I calculate the Z that would be the total amount financed?
I realize there are other things that impact the amount paid per month - possible PMI, HOA fees, other things - but I'm just trying to ballpark out where that line's going to be. What I'm looking for is something like "if I want my mortgage payment to be $Y/month or less and my interest rate is X%, the maximum amount I can finance is Z (so the most house I can buy is Z plus what I've got for a down payment)".
Online calculators aren't really helping me.
Also if you're more spreadsheet-inclined, the PV() function will let you calculate the starting amount of a loan for a given payment, rate, and term.
Of course, as you mentioned, the loan payment isn't the whole thing. In addition to (and more importantly than, IMHO) PMI and HOA, be sure to consider: homeowners insurance, property tax (there's a reason most housing payments are expressed as PITI — principal, interest, tax, and insurance), and maintenance expenses that a tenant does not bear.
posted by primethyme at 1:01 PM on February 9, 2021 [3 favorites]
Of course, as you mentioned, the loan payment isn't the whole thing. In addition to (and more importantly than, IMHO) PMI and HOA, be sure to consider: homeowners insurance, property tax (there's a reason most housing payments are expressed as PITI — principal, interest, tax, and insurance), and maintenance expenses that a tenant does not bear.
posted by primethyme at 1:01 PM on February 9, 2021 [3 favorites]
Best answer: A very approximate calculation is your rent X 120. So if your rent is $1200, you can afford a $150k home.
posted by The_Vegetables at 1:19 PM on February 9, 2021
posted by The_Vegetables at 1:19 PM on February 9, 2021
Best answer: Hey so I bought a house in June and process 100% of my anxiety by micromanaging my personal finances. I did SO MUCH MATH and used every online calculator. I was very prepared.
But I'll be honest, the easiest thing to do was just to ask my mortgage loan officer. I said "I don't want to pay more than $XXXX a month for my total mortgage payment" he said "k hold on" and 30 seconds later said "your purchasing cap is $YYYYYY." It was that fast.
If you don't self soothe via personal accounting, I would very highly recommend you stop what you're doing and just call your loan officer.
If it helps: I'm in Chicago. My closing costs + associated costs of home buying (everything including the inspection and going to fedex to fax a document) were exactly 10% of my home purchase cost. I bought a house I could comfortably afford, which was 2/3 of what I was originally approved for.
posted by phunniemee at 1:24 PM on February 9, 2021 [14 favorites]
But I'll be honest, the easiest thing to do was just to ask my mortgage loan officer. I said "I don't want to pay more than $XXXX a month for my total mortgage payment" he said "k hold on" and 30 seconds later said "your purchasing cap is $YYYYYY." It was that fast.
If you don't self soothe via personal accounting, I would very highly recommend you stop what you're doing and just call your loan officer.
If it helps: I'm in Chicago. My closing costs + associated costs of home buying (everything including the inspection and going to fedex to fax a document) were exactly 10% of my home purchase cost. I bought a house I could comfortably afford, which was 2/3 of what I was originally approved for.
posted by phunniemee at 1:24 PM on February 9, 2021 [14 favorites]
Oh and also, I was prepared to put 20% down because my brother's got a massive PMI payment and I hate toileting money. Talked it through with the loan guy and the cost/benefit for me and my loan it just didn't make sense. I ended up putting 13% down, having a ton of cash on hand for emergencies/enjoying my home, and my PMI is netflix & a takeout pizza once a month for 2 years. I'll survive, lol. But that's the kind of math I just couldn't do on my own, since it was very loan specific.
posted by phunniemee at 1:32 PM on February 9, 2021 [2 favorites]
posted by phunniemee at 1:32 PM on February 9, 2021 [2 favorites]
There are multiple factors here and you should talk to a lender and/or a financial planner to get a better idea of how those factors would come together for you. Mortgage interest and local property taxes are deductible on your federal income tax, but due to recent changes in tax law the deductions were capped while the standard deduction was raised. You should either do some math or let an expert do it for you to figure out if you would end up paying enough on mortgage interest and property taxes to make it worth itemizing your deductions.
Why should you care? If you deductions will increase after a home purchase, you can adjust your tax withholding and end up with more take home pay, which would mean you might be able to afford more home than you think you can. When my wife and I bought our house, the deductions added up to about $400 in extra monthly take home pay after we adjusted withholdings. Even after the aforementioned changes to tax law, we still came out ahead with itemized deductions, although I think maybe we're not as advantaged as we were before 2017. It's worth doing the math before you finalize your budget.
posted by fedward at 2:09 PM on February 9, 2021 [1 favorite]
Why should you care? If you deductions will increase after a home purchase, you can adjust your tax withholding and end up with more take home pay, which would mean you might be able to afford more home than you think you can. When my wife and I bought our house, the deductions added up to about $400 in extra monthly take home pay after we adjusted withholdings. Even after the aforementioned changes to tax law, we still came out ahead with itemized deductions, although I think maybe we're not as advantaged as we were before 2017. It's worth doing the math before you finalize your budget.
posted by fedward at 2:09 PM on February 9, 2021 [1 favorite]
One of the things under consideration for covid related stimulus is a $15K tax credit towards buying a house. I have no idea how likely it is to pass or what interest rates will be like at that point, but especially if you feel like the down payment is a constraint, it might be worth waiting. Conversely, if it's a hot housing market, a feeding frenzy might break out if/when the tax credit is finalized, so you might want to buy before then if you have specific things you really want in a home.
posted by Candleman at 2:22 PM on February 9, 2021 [1 favorite]
posted by Candleman at 2:22 PM on February 9, 2021 [1 favorite]
Do remember to ask about "mortgage plus property taxes", not just "mortgage"! The difference can look like hundreds of dollars every month.
posted by yarntheory at 4:24 PM on February 9, 2021 [6 favorites]
posted by yarntheory at 4:24 PM on February 9, 2021 [6 favorites]
I like to be conservative when it comes to mortgage payments, so don’t underestimate the need for repairs. New roof? Emergency plumber? Garage door decide to break suddenly? Budgeting 1% of your home value per year or $1 / sq ft for emergency repairs is smart.
posted by WedgedPiano at 8:30 PM on February 9, 2021 [1 favorite]
posted by WedgedPiano at 8:30 PM on February 9, 2021 [1 favorite]
Hey I just wanted to second the advice to get a mortgage broker. I'm in the UK, not the US, so I don't know the details, but a mortgage broker in your country will know the other one-off payments that you need to pay alongside your monthly mortgage payments and other things you need to consider.
My mortgage broker explained that I qualify for a loan at a certain level, but if I want to keep my payments to £xxx per month I can only borrow maybe 3/4 of that amount. She also advised that I keep £xx aside for tax and fees to solicitors and all the other costs. It's been so useful to have her advice as I search for a place to buy.
posted by unicorn chaser at 3:26 AM on February 10, 2021
My mortgage broker explained that I qualify for a loan at a certain level, but if I want to keep my payments to £xxx per month I can only borrow maybe 3/4 of that amount. She also advised that I keep £xx aside for tax and fees to solicitors and all the other costs. It's been so useful to have her advice as I search for a place to buy.
posted by unicorn chaser at 3:26 AM on February 10, 2021
In addition to mortgage, pay attention to property taxes, school taxes, and income tax for the location. For me, I was determined to find a house in the city (Pittsburgh). The school taxes are a lot less than the surrounding boroughs but the income taxes are higher. I'm nearly getting close to being ready to start thinking about retirement so I figure income taxes won't be a concern for too much longer.
Also, our home assessments are weird here. In the city your home is assessed at roughly 80% of the selling price. In the next school district (outside the city) it's assessed at the full amount. And school taxes are based on that.
There's so much to consider that I built a spreadsheet where I could plug in the location and it would figure out the various taxes and assessments, giving me an approximate monthly payment for each.
posted by booth at 6:11 AM on February 10, 2021
Also, our home assessments are weird here. In the city your home is assessed at roughly 80% of the selling price. In the next school district (outside the city) it's assessed at the full amount. And school taxes are based on that.
There's so much to consider that I built a spreadsheet where I could plug in the location and it would figure out the various taxes and assessments, giving me an approximate monthly payment for each.
posted by booth at 6:11 AM on February 10, 2021
As well as mortgage+property taxes, find out about insurance!. If you're buying a condo/coop, or in a homeowners association what are the monthly fees? If you're buying a house think about having serious reserves for repairs.
The "you can get a cheap mortgage" is only part of it.
---
Also: do you want to put down roots? How easy is it to sell in that market?
Are there nasty surprises about the neighborhoods you're looking in that you'd discover after a month or two?
The other thing to note is it is often better to buy when you don't have to buy, so you don't feel under pressure.
....So, all of this taken into account, I would buy after renting in a neighborhood (or visiting the neighborhood) for a few months.
posted by lalochezia at 1:30 PM on February 10, 2021
The "you can get a cheap mortgage" is only part of it.
---
Also: do you want to put down roots? How easy is it to sell in that market?
Are there nasty surprises about the neighborhoods you're looking in that you'd discover after a month or two?
The other thing to note is it is often better to buy when you don't have to buy, so you don't feel under pressure.
....So, all of this taken into account, I would buy after renting in a neighborhood (or visiting the neighborhood) for a few months.
posted by lalochezia at 1:30 PM on February 10, 2021
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posted by saeculorum at 12:51 PM on February 9, 2021