Mortgage Rates

Finding the Best Mortgage Rate

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Let’s face it: there isn’t much to enjoy about shopping for mortgages. Checking interest rates, filling out loan applications, choosing a lender, etc. It’s all a reminder that for the next 15 to 30 years, you are going to be writing very large checks and sending them away month after month after month. It’s the part of buying a home that most of us would skip over if we could.
Of course, unless you’ve got the cash on hand to buy a house outright (in which case, congratulations—you’ve done well for yourself), taking out a mortgage is a necessity and finding a good deal could make a huge financial difference for you in the long run. Even minor disparities in the interest rate on a six-figure loan can add up to tens of thousands of dollars over the life of a 30-year mortgage.
As unpleasant as it may be, this is one instance where it’s wise to take your time. Mortgage lenders want your business and the first offer you see may not be the best offer you can get. It’s best to shop around, compare mortgage rates and choose carefully. Or use a tool that has already done that for you (that’s up above!).

So what does a good deal on a mortgage look like?

Well, it depends. Most banks advertise with the lowest available home loan rates, but many homeowners don’t qualify for those super-deals. Lenders charge different borrowers different rates, based on how likely each person is to stop making payments (to default, in other words). Since there’s no way to know exactly how likely a person is to default, lenders try to guess. They generally believe that someone with plenty of savings, high income and a history of meeting all their financial obligations is less likely to stop making payments. It would require a pretty drastic change in circumstances for this kind of homeowner to default.
On the other hand, someone with a history of late or missed payments on other forms of credit (a bad credit score, in other words) is considered a lot more likely to default. The same goes for a person whose income is not much larger than her monthly loan payment. In that case, even a slight change in the borrower’s finances could be trouble.
So let’s say you’re in that first group with a credit score in the neighborhood of 750-850, more than enough assets to make the recommended 20% down payment on your house, net income over three times your monthly payment. Lenders will probably see you as a reliable borrower who is likely to make payments reliably, so in this case you may actually qualify for the lowest advertised home interest rates.
As of October 2015, the current mortgage rate was around 3.8%, for a 30-year fixed-rate mortgage, according to Freddie Mac. Of course, these 30-year mortgage rates fluctuate. Average mortgage rates don’t just depend on borrowers’ credentials. They also go up or down with the prevailing interest rate in the economy.
If you miss the mark on any of the key criteria for being an ideal borrower, expect to pay a higher rate. How much higher depends on your specific circumstances, but it isn’t unusual to pay an interest rate several percentage points above the lowest listed rate.

The Difference Between the APR and the Interest Rate

The APR (Annual Percentage Rate) is the true cost of the mortgage. It takes into account all the fees and charges you pay when you receive the mortgage and spreads those out over the life of the loan so that you know how much you’re actually paying.
In contrast, your stated interest rate is the number used to determine your monthly payment - it’s the percentage of the loan balance that you pay in interest on an annual basis, no extra costs included. Of the two, the APR is more informative.
The federal government requires banks to list the APR so that they can’t charge hidden or unexpected fees. It is very useful when comparing two different loans, especially when one has a relatively low interest rate and higher closing costs and the other has a higher interest rate but low closing costs. The mortgage with the lower APR is probably the better deal.
An APR that’s higher than the stated interest rate is actually pretty normal. Usually it’s only a few fractions of a percent higher, though — anything larger than that should be given a second look. When you’re looking at 40-year mortgage rates and 30-year mortgage rates those fees are spread out over a longer period of time. The APR probably won’t be much higher than the interest rate. But for 20-year mortgage rates, 15-year mortgage rates and 10-year mortgage rates the difference between the interest rate and the APR will likely be greater.

Should I choose my mortgage entirely based on the APR?

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Not exactly. The APR is a great tool for comparing two mortgages with different terms but ultimately it's important to consider all aspects of your loan when making a decision. For example, if your savings account is bursting with cash, you may be willing to pay some higher closing costs for a loan with a lower monthly payment that is more in line with your regular income.
And there are other, non-financial factors as well. Every mortgage lender does business its own way. Some use a personal touch with each customer and others offer the most cutting-edge technology to make your borrowing experience easy. Do you prefer a small, local institution? Or a national bank with a 100-year history and an established reputation?
There’s no right answer to any of these questions, but they are important to think about nonetheless. You could be making payments on your mortgage for 30 years, so you should find a lender you feel comfortable with. Before you sign your papers, it’s best to do a little research on your lender. See what they say about themselves and what their customers say about them.

Ok, but which banks offer the lowest rates?

The truth is, no mortgage lender has a clear edge when it comes to mortgage rates. Each has its own specific methods for calculating which rates to charge which borrowers, so the bank with the best rate for Mr. Smith might not have the best offer for Ms. Brown. It really depends on individual circumstances. This is why it’s so important to look into a variety of lenders and see what they are offering you. A tool that compares mortgage rates for your specific situation can be a great help with this process. (Oh look at that, if you just scroll up there’s one right there!)

Source : https://smartasset.com/mortgage/mortgage-rates

Rent vs Buy

If you stay in this house for 3 years, Buying is better than Renting.

Year

Year 3	Renting	Cost Difference	Buying
Monthly Cost	$1,790	-$489	$2,278
Total Cost	$63,167	$4,033	$59,134

$63,167$59,134

Mortgage Type Options

• 30 yr Fixed
• 15 yr Fixed
• 5/1 ARM

No mortgages were found.

Disclosure View more mortgages

Cost Comparison Over Time

13579111315

Cost of Renting $329,702

Cost of Buying$170,204

Break Even Year

• About This Answer

Cost of Renting Over 3 years		Cost of Buying Over 3 years
Rent	($63,167)	Home Equity	$81,325
Renter's Insurance	$0	Home Value	$281,220
		Mortgage Balance	($199,895)
		Upfront Expenses	($34,788)
		Down Payment	($25,000)
		Mortgage Fees	($775)
		Other Closing Costs	($9,013)
		Ongoing Expenses	($95,185)
		Mortgage Payment	($59,148)
		Mortgage Insurance	($3,570)
		Property Taxes	($15,923)
		Homeowner's Insurance	($4,136)
		Maintenance & Other Expenses	($12,408)
		Selling Expenses
		Closing Costs	($16,873)
		Capital Gains Tax	$0
		Proceeds From Home Sale	$64,452
		Tax Savings	$12,415
		Lost Interest Income	($6,028)
Total	($63,167)	Total	($59,134)

• Our Assumptions

Mortgage data: We use live mortgage data when calculating your home affordability.

Closing costs: We have built local datasets so we can calculate what closing costs will be in your neighborhood.

Selling expenses: Our data partnerships allow us to accurately estimate the costs incurred during a home sale.

Taxes: We calculate taxes on a federal, state and local level. The implications of real estate taxes, mortgage interest, mortgage points, mortgage insurance and other factors (including if you do or do not pay the Alternative Minimum Tax) are all considered in our models. To better align with filing season, tax calculations are based on the tax filing calendar, therefore calculations prior to April are based on the previous years tax rules.

Home maintenance expenses: We calculate maintenance fees based on an “Annual Maintenance Fee” (which is a % of the home value) and “Monthly Additional Expenses” (which are fixed expenses that grow with inflation).

HOA fees: We assume that HOA fees are a fixed expense and that they grow with inflation.

Homeowners insurance: We assume homeowners insurance is a percentage of your overall home value.

The Rent vs. Buy Decision

For a long time, the common wisdom was that buying a home was a far better financial choice than renting one. Throughout the second half of the 20th century, and into the first years of the new millennium, home prices across much of the country marched steadily upwards, and a house was considered the safest investment around. The logic was simple: if you were spending 30% of your income on housing anyway, might as well spend that hard-earned dough on something that would retain its value for you in the future. Renting, in contrast, was like lighting your money on fire and tossing it in the trash. The rent versus buy decision was a straightforward one.
That all changed in 2007, when the housing bubble that had been silently growing suddenly went pop. A house, it turned out, could lose value—and, as some real-life cases demonstrated, could do so in spectacular fashion. There were stories of totally abandoned neighborhoods outside of Las Vegas, and half-constructed mansions in Florida. Those with the misfortune to buy at the peak of the market in 2006 lost thousands or even millions of dollars overnight. Mortgages went underwater. A foreclosure crisis ensued. Meanwhile, the renters of the world were doing relatively well.

Today, there is no clear answer to the rent v buy question. In some cities, and for some individuals, buying a home may make more sense, while for others, renting a home may be the better choice. What makes sense for Nina in New Orleans and Steve in San Diego may not make sense for Dan in Denver and Christina in Chicago. So how does one decide the answer to this question of, Should I rent or buy?

Where a Rent vs. Buy Calculator Can Help

Perhaps the most important factor to consider when making this buy or rent decision is how long you plan to stay in your home. If you’ll only be in town a year, renting will almost always be your obvious best choice. If you’re planning on packing up and leaving 12 months down the line, you probably don’t want to spend the time and money necessary to buy a house: think down payment, closing costs, loan charges, appraisal fees and so on. All told, the upfront costs of finding a house and taking out a mortgage can be in the tens of thousands of dollars (or higher!). As a renter, at worst you’ll have to pay a small application fee and make a refundable security deposit of a few months’ rent.
On the other hand, if you plan on staying put for 50 years, renting almost always makes no sense. In the long run, there are significant advantages to homeownership, one of the largest being the mortgage interest deduction, a tax benefit that allows you to deduct mortgage interest payments from your taxable income. For example, if you have a $2,000 monthly mortgage payment, and $1,500 of that goes toward interest, you can deduct that $1,500. So, your taxable income will be $1,500 lower. If we assume you pay a marginal tax rate of 30%, you would pay about $450 less in taxes each month by taking that deduction (30% x $1,500 = $450).
Rental payments, in contrast have no such advantages. Indeed, while a portion of each mortgage payment goes toward increasing your stake in your home by increasing your equity, rental payments go entirely to your landlord, and tend to grow over time. In the long run, the costs of renting can be much higher than buying.
So, if renting is better in the short-run and buying is better in the long run, when does the financial logic switch? When, in other words, do the long-run costs of renting begin to outweigh the upfront costs of buying? It could be three years, or seven or 15. The timing depends largely on where you live. That’s why our rent vs. buy analysis is location-based.

Should I buy or rent? Rent vs. Buy Examples

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As the saying goes: all real estate is local. That has never been truer than it is today. Some housing markets are booming and others are stagnant, and while in some cities rents have taken off, in others they remain as low as ever.
Take Atlanta, for example. Home prices there rose by about 4.4% over the past three years, while rents on two-bedroom apartments jumped 3.4% over the same time period. At those rates, it would likely make more sense for a person looking for a typical two bedroom home to buy if she planned on staying just two years.
In a city like San Francisco, where a typical house can sell for upwards of $500,000, the math can look a little different but the results are the same. Rents in San Francisco have jumped a whopping 8% in the past year, and home prices rose even more rapidly than that, by over 10% according to the Case-Schiller Index. If those rates hold, a San Franciscan staying in town for more than two years should buy now—if she can afford it.
New York City is a different story. Home prices in New York’s notoriously difficult housing market rose just 1.45% over the past three years, while rents over that period rose by around 5%. Even if you were able to find a two-bedroom for $350,000, it would only make financial sense to purchase it if you planned on staying put for a full 18 years.
The Big Apple is a big outlier when it comes to your rent or buy decision, however. Most cities in the U.S. are like Minneapolis, where home prices have risen 7% over the past three years, and rent for the average two bedroom apartment has gone from $960 to just over $1000, a 4.3% increase. In Minneapolis, a person looking for a typical house should buy if he plans on staying at least two years and has the money available for the upfront costs. The lesson here? When asking Should I rent or buy a house? be sure to take your location into account.

Reasons You Might Want to Rent or Buy a House

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Of course, while analyses like the above assume you are making your decision for purely economic reasons, there are other, non-financial factors that you may want to think about as well when wondering Should I buy or rent a house? Many renters, for example, enjoy the flexibility of being able to change pads at the end of their lease. For a homeowner, if you want to move, there’s quite a few hoops to jump through: find a real estate agent, get the house listed, meet with prospective buyers, accept bids, make a deal and, eventually, pay a bunch of fees to close the sale. Getting all of that done can take months, and can be very expensive.
On the other hand, buying a home gives you year-to-year continuity. Rents can change drastically over the course of just a few years, and there’s the ever-looming threat of eviction if a rent increase proves too much for you to afford. Most of the time as a homeowner, you won’t face any spikes in your payment (adjustable-rate mortgages are one exception), and you won’t have to worry about being tossed out on the street if your payment becomes too expensive.
Then there’s the question of maintenance: fixing leaky pipes, painting, cleaning gutters—these are all costs of owning a home, but many homeowners enjoy putting time and energy into their homes. By the same token, many renters complain of unresponsive landlords who refuse to deal with things like bad plumbing or a faulty fridge. These matters of personal preference are the intangibles that even the best rent or buy calculator (see above) can’t account for. Answering the question of Should I rent or buy a home? may require some soul-searching.
In the end, the rent vs. buy decision comes down to your preferences and plans. If you know exactly how long you want to stay in your home and where you want to live, and you have some money saved up, the decision could be as easy as calculating which option will cost you less. If your future is less clear, however, you may have more to consider.

Source : https://smartasset.com/mortgage/rent-vs-buy

Mortgage Calculator

Home Value Equity -114.8%

Mortgage Balance

Rate

Remaining Term

	Monthly Mortgage Payment: $2,400

Total Estimated Monthly Payment $2,947 Mortgage Payment $2,400 Home Insurance $113 Real Estate Taxes $434 Mortgage Insurance (PMI) $0

Recommended Minimum Income $98,240 To afford monthly payments of $2,947 per month, we recommend household income of $98,240 or greater. Monthly Debt Recommended Savings $18,892 Minimum Down Payment $9,275 Closing Costs $775 Reserve $8,842

15 YR FIXED MORTGAGE OPTIONS
by smartasset.com

The Mortgage Calculator: A Time Machine for Your Mortgage Future

So you’re thinking about buying a home, and you want to get a mortgage to finance your purchase. First of all: congratulations. Buying a home is an exciting process, but one that can at times be daunting. There are a lot of numbers involved, some of them frighteningly large. For non-professionals, it can be hard to understand all of the options, not to mention all the lingo. This is where a free mortgage calculator can come in handy: it allows you, the homebuyer, to see exactly what your mortgage payments will look like on a monthly basis, and how your payments and debt will evolve over the course of the mortgage. Think of it as a sort of time machine, allowing you to peer into your future as a homeowner and look over your own shoulder as you examine your monthly mortgage statement.

Why should I use SmartAsset’s mortgage calculator?

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For starters, our mortgage calculator is free and very easy to use. You provide a little bit of information about the house and mortgage you are considering, and voila! The home loan calculator spits out everything you need to know about your future payments. It can tell you, for example, what the monthly payment will be in year 7 of your mortgage term. It can tell you how much you will owe at the end of year 19. It can tell you at what point you will have more equity than debt. You get the idea.
Even if you aren’t the type of person who carefully budgets every monthly expenditure, a home mortgage calculator is perfect for getting a general idea about your future payments. Plus, there’s a pie chart!

The Basics: Target Home Price, Down Payment and Location

Ready to try our monthly mortgage calculator? Great! Let's do this. The first step is to provide a little background information about your prospective home and mortgage. These numbers can be adjusted later on, so don’t worry about getting them exactly right to start out. There are three blanks you’ll need to fill in: target home price, down payment and location.
Target home price is the price you will pay for your home, not including closing costs or any other fees. If you’ve already started searching for a home, you probably have some idea what you might pay. If not, check out our How much house can I afford? tool. For now, let’s use a home costing $200,000 as an example – this is approximately the median U.S. home price as of 2014.
The amount of your target home price not covered by your mortgage is the down payment. This is your up-front cash payment and it typically ranges from 3.5% to 20% of your home price. In our $200,000 example, a 20% down payment would be $40,000.
Your mortgage will pay for the remainder of your target home price - $160,000 in our example. That's your initial mortgage amount. You'll note that the down payment and the initial mortgage amount are directly linked: if one goes up, the other must go down.
Once you have this information entered, you’re ready to let our mortgage payment calculator do what it does. Take a look at the pie chart we promised.

SmartAsset’s mortgage calculator projects that monthly payments on a $200,000 home with a $160,000 30-year fixed-rate mortgage in Ann Arbor, Michigan will be $1,206 in year one.

How does my mortgage payment charge over time?

The mortgage calculator breaks your monthly payment into four separate categories: principal, interest, property tax, and homeowners insurance. These categories represent the four “slices” of your payment pie, and each of them will evolve over time. Before we get to that, however, it’s important to have a good understanding of each slice, so that you can understand why you are paying that particular amount and why it might change.
Let’s start with principal, the portion of each payment that goes toward paying down the balance of your loan. Every dollar you pay in principal is one less dollar you owe the bank. Paying principal feels good. In contrast, paying interest does not reduce your debt. Your interest payment is calculated as a percentage of your mortgage balance—the amount of the loan that you have not paid off. Together, principal and interest account for your mortgage payment. Over time the principal slice will grow and the interest slice will change—but we’ll get to that in a minute.
First, let’s talk about the other two slices of our pie, property tax and homeowners insurance. The real estate tax is generally a percentage of the value of your home, and is based on local property tax rates. Homeowners insurance varies in a number of ways, including the potential threats to your home from things like floods and hurricanes.
Now, are you ready for the fun part?

Our Mortgage Payment Calculator in Action

By adjusting the year on the mortgage loan calculator, you can watch how your payment evolves over the course of your mortgage’s term. It’s like traveling through time: as you move from year 1, to year 2, to year 3 and so on, the make-up of your payment changes—some of the pie pieces grow, and some shrink.

With SmartAsset’s mortgage calculator, you can see how your payments will change over time. In this example, the total payment grows because of home appreciation, which lifts property taxes over time.

Cool, right? And it gets even better. Do you notice how, as you move further along in your mortgage term, a greater portion of your monthly payment goes toward principal, and less toward interest? This is because with every single payment you make, your loan balance falls, so you have that much less debt on which to pay interest. This is called amortization. Over the length of your loan, as your mortgage balance falls, your equity grows—equity is the difference between the home value and the mortgage balance. Think of it as the portion of the house you own as opposed to what the mortgage lender owns. On day 1, when you’ve just been handed the keys and your house still has that new-house smell, your equity is equal to your down-payment—$40,000 in our earlier example.
The mortgage calculator also incorporates home appreciation into its calculations; this is the tendency of homes to gain value as time passes. The mortgage calculator assumes a home appreciation rate of 2%, but this is adjustable.

How to Play Around With Our Simple Mortgage Calculator

Can you play around with the inputs on our house payment calculator? Absolutely! The values you entered earlier for target home price, location and down payment are all adjustable. You can change your mortgage interest rate, the home appreciation rate and even the type of mortgage you are using: the standard is a 30-year fixed-rate, but options include 15-year fixed- and a number of adjustable-rate mortgages. (Learn more about which one of these is right for you here.)
So try messing around with all of these numbers on our mortgage estimator. See what happens to your monthly payment when your interest rate falls, or when you make a larger down payment. Try out a few different home prices with a few different mortgages. The possibilities are endless! SmartAsset gives you a mortgage calculator with taxes and PMI (Private Mortgage Insurance) included, so you can get a clear picture of your housing costs.

Can the mortgage calculator estimate mortgage payments if I pay extra each month?

I’m glad you asked. One of the advanced options on the mortgage calculator is prepayment. This allows you to add a bonus amount to your monthly payment that goes toward paying down your principal. The higher the prepayment amount, the sooner your mortgage balance (and mortgage payments) will go to zero.
Got the hang of calculating your mortgage payment using our tool? Great. Remember, a mortgage calculator is just one of many tools you can use to help you make a smart financial decision in the home-buying process. You can consult it at any point in the process, as many times as you want, and use it in conjunction with other resources.

How much house can I afford?

How much house can I afford?

Buying a new home should be exciting but it should also provide you with a sense of stability and financial security. Living month to month, with barely enough income to meet all of your obligations, the threat of foreclosure looming if you slip up—well that’s the wrong kind of excitement. That’s why it’s so important that you know ahead of time the answer to that very important question, How much house can I afford?

The 36% Rule: The Original Mortgage Affordability Calculator

In order to avoid the nightmare scenario of buying a house that breaks the bank, you’ll need to figure out a housing budget that makes sense for you. One How much house can I afford? rule of thumb that can be helpful in doing so is the 36% rule, which says that your total debt payments should never add up to more than 36% of your gross (i.e. pre-tax) income. In practice, that means that for every pre-tax dollar you earn each month, you should dedicate no more than 36 cents to paying off your mortgage, student loans, credit card debt and so on. (Side note: since property tax and insurance payments are required to keep your house in good standing, those are both considered debt payments in this context.)
This is more a rule of thumb than a strict limit, but most banks don’t like to make loans to borrowers with bad debt-to-income ratios. Although it’s possible to find lenders willing to do so (often at higher interest rates), the thinking behind the rule is instructive. If you are spending 40% or more of your pre-tax income on pre-existing obligations, a relatively minor shift in your income or expenses could wreak havoc on your budget. Banks don’t like to lend to borrowers who have a low margin of error. That’s why your pre-existing debt will affect how much home you qualify for when it comes to securing a mortgage.
But it isn’t only in your lender’s interest to keep this rule in mind when looking for a house; it’s in yours too. Since lenders tend to charge higher interest rates to borrowers who break the 36% rule, you’ll probably end up spending more on interest if you go for a house that places you beyond that limit. Furthermore, while the difference between the house that eats up 45% of your monthly income and one that only takes 35% is likely not huge, that extra 10% of income can be critical if your financial situation changes (like say your utility payments rise or gas prices skyrocket). With something as important as a house, it’s nice to have a bit of a cushion for when things go wrong.

The Down Payment and the Cash Reserve

Another key number in determining the answer to How much house can I afford? is your down payment. The larger the down payment; the larger the house, right? Well, yes, but before you go and empty out your savings account, keep in mind that lenders generally want you to have a cash reserve remaining after you’ve moved in. Why? Having some money in the bank after you buy is a great way to help ensure that you don’t find yourself worrying about the two dirty words in homeownership: default and foreclosure. The question isn’t just Can I afford a house? It’s Can I afford a house and still have some money left over as a buffer?
While maintaining a debt-to-income ratio under 36% protects you from minor changes in your finances, a cash reserve protects against major ones. At a minimum, it’s a good idea to be able to make three months’ worth of housing payments out of your reserve, but something like six months would be even better. That way, if you experience a loss of income and need to find a new job, or if you decide to sell your house, you have plenty of time to do so without missing any payments (and, in turn, wrecking your credit).
Think of your cash reserve as the braking distance you leave yourself on the highway—if there’s an accident up ahead, you want to have enough time to slow down, get off to the side or otherwise avoid disaster. A good home affordability calculator (like ours!) will make sure you have this cash reserve at the end of the homebuying process.

How Much Home Can I Afford? The Housing Match Game

So now we have two guidelines that can help you figure out the answer to How much house can I afford? The first is the 36% rule, which says that your debt-to-income ratio should stay under 36%; that is, your total debt payments, including your housing payment, should never be more than 36% of your income. The second regards your cash reserve: you should always try to keep at least three months’ worth of payments in the bank in case of an emergency. That all sounds great in theory, but how does it play out in the real world? To demonstrate that, let’s take a look at a few hypothetical homebuyers and some hypothetical houses to see who can afford what. It’s… the Housing Match Game!!

The contestants
	Ages	Monthly Income	Monthly Debt Payments	Savings
Peter & Sally C.	40, 39	$3,500	$250	$10,000
Mary P.	29	$7,250	$500	$40,000
Mark Z.	84	$40,000	none	$185,000

House #1 is a 1930s-era three-bedroom ranch in Ann Arbor, Michigan. This 831 square-foot beauty has a wonderful backyard, and includes a two-car garage. While the interior needs some love, the house is a deal at a listing price of just $135,000. So who can afford this house? Peter & Sally C., Mary P. and Mark Z.
Analysis: All three of our homebuyers can afford this one. For Mary P. and Mark Z., who can both afford a 20% down payment (and then some), the monthly payment will be around $800, well within their respective budgets. The math is a little trickier for Peter and Sally, but it still works out. They can afford to make a down payment of $7,000, just over 5% of the home value, which means they’ll need a mortgage of about $128,000. In Ann Arbor, their mortgage, tax and insurance payments will be around $950 dollars a month. That, combined with their debt payments, adds up to $1,200 – or around 34% of their income.

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House #2 is a 2,100 square-foot architectural masterpiece in San Jose, California. Built in 1941, it sits on a 10,000 square-foot lot, and has three bedrooms and two bathrooms. It’s listed for $820,000, but could probably be bought for $815,000. So who can afford this house? Mark Z.
Analysis: While this one’s a little outside of our other homebuyers’ price range, Mark Z. can make it happen. Using the 36% rule, Mark’s monthly housing budget is around $14,000. The mortgage, property tax and insurance on this property will total somewhere around $4,100 – so he could actually afford to pay more on a monthly basis. For a house this expensive, lenders require a larger down payment—20% of the home value—so Mark Z. is limited to a house worth five times his savings (minus that cash reserve equaling three months’ payments).

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House #3 is a two-story brick cottage in Houston, Texas. With four bedrooms and three baths, this 3,000 square-foot gem is the perfect place to raise a family. And it only costs $300,000! So who can afford this house? Mary P. and Mark Z.
Analysis: Mark Z. can easily afford this place, but for Mary P. it’s a closer call. Assuming she makes a down payment of $27,300, or just under 10%, her monthly housing payments will be $2,110. Add in the $500 student loan payments she’s making each month, and you’ve got total debt payments of $2,610, which is exactly 36% of her income. Plus, even after she pays her down payment and all the closing costs, she’ll have around $7,800 left in savings, enough for four months’ worth of housing payments.

Can I afford a house? vs. Should I buy a house?

In our game, even though Mark Z. can technically afford House #2 and Mary P. can technically afford House #3, both of them may decide not to. If Mark Z. waits another year to buy, he can use some of his high income to save for a larger down payment. Mary P. may want to find a slightly cheaper home so she’s not right at that maximum of paying 36% of her pre-tax income toward debt.
The problem is that some people believe the answer to How much house can I afford with my salary? is the same as the answer to What size mortgage do I qualify for? What a bank (or other lender) is willing to lend you is definitely important to know as you begin house hunting. But ultimately, you have to live with that decision. You have to make the mortgage payments each month and live on the remainder of your income.
So that means you’ve got to do some homework (sorry!). The factors you should be looking at include those about your personal financial situation (income, credit rating, existing debt, down payment and savings) and external factors (mortgage term, current interest rates, private mortgage insurance and the local real estate market). Plugging all of these relevant numbers into a home affordability calculator (like the one above – check it out!) can help you determine the answer to How much home can I afford? (It helped Peter & Sally C., Mary P. and Mark Z.) But beyond that you’ve got to think about your lifestyle- like how much money that leaves you for travel, other financial goals, etc. You might find that you don’t want to buy the most expensive home you can afford.

Some Home Affordability Advice

After all, there is something to be said for the idea of not maxing out your credit possibilities. Here’s some advice for Mary – and the rest of us. If you look at houses that are priced somewhere below your maximum, you leave yourself some options. For one, you will have room to bid if you end up competing with another buyer for the house. As another alternative, you will have money left over for renovations and upgrades just in case the house needs a little work in order to fully transform into your dream home.
Perhaps more importantly, however, you avoid putting yourself at the limits of your financial resources if you choose a house with a price lower than your maximum. You will have an easier time making your payments, or (better yet!) you will be able to pay extra on the principal and save yourself money by paying off your mortgage early.

Reasons to Postpone a Home Purchase

Along the same lines of thinking, you might consider holding off on buying the house. This advice goes for Mark, but it could apply to any of us. The bigger the down payment you can bring to the table, the smaller the loan you will have to pay interest on. In the long run, the largest portion of the price you pay for a house is typically the interest on the loan. In the case of a 30-year mortgage (depending, of course, on the interest rate) the loan’s interest can add up to three or four times the listed price of the house (yes, you read that right!). For the first ten years of a 30-year mortgage, you could be paying almost solely on the interest and hardly making a dent in the principal on your loan.
That’s why it can make a significant difference if you make even small extra payments toward the principal, or start with a bigger down payment (which of course translates into a smaller loan). If you can afford a 15-year mortgage rather than a 30-year mortgage, your monthly payments will be higher, but your overall cost will be drastically lower because you won’t be paying nearly so much interest.
That sounds great, but it’s not always the best option either. If the 15-year mortgage puts you uncomfortably close to your maximum—meaning you won’t have any room in your budget for emergencies or extras—you could always lock into a 30-year mortgage while making a commitment to yourself to make payments the size of the 15-year plan unless there’s a financial emergency. If you go with this plan it’s important to make sure your mortgage terms do NOT include a penalty for paying off the loan early. This is known as a pre-payment penalty and lenders are required to disclose it.

So, should I buy a home?

When it comes to answering the question of How much house can I afford?, it’s important to remember that the mortgage lender is only telling you that you can buy a house, not necessarily that you should. Only you can decide whether you should make that purchase.

Source : https://smartasset.com/mortgage/how-much-house-can-i-afford