BY MILDRED WONG
MYTH: Buy as much house as you can afford.
FACT: It is easy to overspend because you want the most your money can buy. However, it is not wise to max out your home budget.
Generally, you can afford a house up to triple your gross annual income, or the money you make in a year before taxes. For example, if you earn $75,000 a year, you can afford up to $225,000 for a house. This is a starting point. For a complete picture, take into account other debts you may have, such as car payments, student loans, credit cards and other bills.
When applying for a home loan, lenders will look at what you earn, what you can pay on a house and what you owe. They generally follow the 28/36 Rule. To determine your monthly income, take your gross annual income and divide by 12. Your monthly housing expense should not be more than 28 percent of your monthly income.
Factoring in all your other bills, including the mortgage, your total monthly expense should not be more than 36 percent of your monthly income.
To summarize the above example:
Gross annual income: $75,000
Monthly income: $6,250 ($75,000/12)
Housing expense: $1,750 ($6,250 x 28 percent)
Housing + all expenses: $2,250 ($6,250 x 36 percent)
“This is a major investment, so I really need to get as much house as I can.” GET REAL! It is never a good idea to get so much house that you have to cut corners in other areas just to pay the mortgage. Going out to dinner and a movie should not break the bank. Avoid being “house poor” but still have the house you really want. Look at your needs now. Consider any near-term plans, such as going to graduate school or starting a family. Then buy the house that has the space you need that is affordable to you. Look at properties at the bottom of your price range, or even below your range, and work your way up. Buy comfortably, not excessively.
Want to try plugging in your own numbers? Here are two useful tools:
This simple and straightforward calculator provides an estimate of the house price you can afford.
This calculator keeps a running tally of the most common expenses of owning and renting, such as mortgage payments, property taxes, insurance, maintenance and utilities. It also accounts for “lost opportunity cost,” which is the return you could have earned investing your money instead of using it on a down payment. www.nytimes.com/interactive/business/buy-rent-calculator.html
CALL TO READERS: Buying or selling and have questions? Call or email and your topic could be the next discussion. Mildred Wong is a Licensed Real Estate Agent at City Central Realty, LLC. She can be reached at 617-236-2020 or firstname.lastname@example.org. Follow her on Twitter: @GetRealwMildred.
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