How Much Mortgage Can You Really Afford? Here Are 4 Steps That You Can Take To Find Out
So you want to buy a brand new house? It’s a big decision to make and can be a very tedious process. On top of that, many folks are easily influenced to buy homes that are more expensive than they can pay for. To help you avoid the same mistake as most people have done while house-hunting, here are four steps to know how much mortgage you can really afford:
Step 1: Mortgage loan pre-approval
People who have already bought homes, or are in the still in the process of acquiring one, know the feeling of being prequalified because the results are usually surprising. Financial experts might say that you’re approved for a million-dollar home, but always remember that banks are also businesses maximizing their profits. Sure, they’ll offer the highest loan amount they can, but that’s because borrowing money equals more interest for them.
Another problem is banks don’t consider monthly expenses like utilities and child care when resolving maximum approval amounts. They don’t look into your spending habits, the length of your stay in the house, or what your newest home expenses will be. So once you receive the bank’s magic “pre-approved loan amount,” know that it’s only the first step in your analysis.
Step 2: Calculate new house expenses
The loan amount that a bank gives depends on the amount of monthly payments they’ve concluded you can afford. As we’ve mentioned, they don’t take into account all the new fees that may appear together with your brand new space.
You’ll need to calculate the taxes, insurance, utilities, furniture/decor, and other expenses that may arise. If the house you’ve bought needs repair and renovation, then the payments may be higher than usual as well. On the other hand, if you upgrade to a larger home, then there’s no doubt that you’ll have increased expenses.
Step 3: Review your budget
If budgeting isn’t something you’re used to, or if you usually guesstimate your expenses, now is the best time to dive into your spending habits. Start by making a list of all your sources of income and adding them up. To figure out your monthly expenses, look into the checking and credit cards for the past three months.
Also, divide the expenses into fixed and discretionary. Fees that are paid every month and are usually consistent amounts like mortgage, rent, utilities, and car payments are fixed, while everything else is discretionary. List down all your fixed expenses and categorize every discretionary item on your spreadsheet. Then, look into the average amount you’ve spent on each of them over the last three months.
Step 4: Analyze
After finalizing your budget, add in the amount you’re planning to spend on the brand new mortgage, plus the home expenses you’ve figured in Step 2. Ask yourself if this monthly payment is practical, doable, and sustainable as you consider the future. The most important part of this process is you’ll have to be honest with yourself on what you can and cannot afford.
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