How Much Mortgage Can I Afford
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With the cost of housing increasing in many areas, it can be difficult to know just how much mortgage you can afford. Taking the time to properly assess your financial situation and the potential mortgage amount you can afford is essential before you go house shopping. Here are a few steps you can take to determine how much mortgage is right for you.
Understand Your Finances. First, you need to understand your overall financial situation and your income. Look at your net income, as well as any existing debts, such as credit cards or student loans. All of these factors will impact how much mortgage you can reasonably carry.
Calculate What You Can Afford. Generally, a lender will approve you for a mortgage that is approximately 2.5 to 2.75 times your annual income. While this does not mean you have to limit yourself to this figure, it’s a good way to start understanding a safe and comfortable amount you may be able to afford.
Calculate Your Monthly Payments. Include not only the principal amount of the mortgage when calculating your monthly payments, but also factor in taxes, insurance and closing costs. This will give you a more accurate picture of how much debt you can afford.
Factor in Unexpected Expenses. When contemplating taking out a mortgage, ensure that you will be reasonably able to cover other expenses in life, such as food, gas and entertaining. Unexpected costs, such as car repairs or medical bills, can quickly add up if you’re already stretched too thin financially.
Consider Your Time Horizon. Finally, the amount of money you can reasonably afford to put toward a mortgage will be dictated by your time horizon and goals. If you plan to stay in the same home for five or more years, it may make sense to take on a larger mortgage to get a nicer house. Conversely, if you’re looking for a short-term solution, it’s probably best to take on a smaller loan amount.
In the end, the amount of mortgage you can afford will ultimately come down to your financial situation and goals. However, following these steps will put you well on your way to finding a mortgage payment you’re comfortable with.