How Much Home Can I Afford?
Jan 22 2021
Many factors determine how much home you can afford. Here’s how to figure it out – before you fall in love with your dream home.
It’s fun to dream about everything you might want in a home – think waterfall shower, walk-in kitchen pantry or patio bar.
But when you’re ready to make that dream a reality, before you go house-hunting, you’ll need to figure out how much home you can afford. Many factors, like your down payment, property taxes and interest rate, go into determining that number.
Bell Bank Mortgage has a handy calculator that computes the most expensive house you can buy based on the highest payment you can afford. (It does not indicate whether you would qualify for the loan.)
4 Steps for Filling Out the Home Mortgage Calculator
- Figure out what you can afford for a monthly payment, including all taxes, fees, dues and insurance.
- Add up all of your take-home pay. (Only include income from side jobs, bonuses and commissions if this is something you earn on a regular basis.)
- Subtract your regular monthly payments including bills like car loans, credit cards, student loans, insurance and mobile phone charges.
- Estimate and subtract any other monthly expenses you might have, considering what you typically spend on things like gas, food, gifts and donations.
- This is an estimate of a monthly payment you may be able to afford, based on your income, debt and expenses. Keep in mind, this payment may have to include taxes, fees, dues and insurance.
- Calculate how much you’ll be able to make in a down payment.
- Next, you’ll need your interest rate, which varies, based on factors like the length of your loan, your credit score and your loan type. (We’ll explain more about what determines your interest rate later, but for now, you can input different interest rates to give yourself an estimate.)
- Finally, you’ll need your combined state and federal tax rate. (If you don’t know what yours is, our calculator estimates 25%.)
Why Should I Meet with a Mortgage Lender Before Finding a Home to Buy?
A mortgage lender will talk with you and help make sure you’re on the right track to meet your buying goals. You can review your credit, down payment options and discuss programs available. Plus, when you meet with a mortgage lender for a FREE pre-approval before looking for a home, real estate agents, builders and sellers will know you’re a serious buyer who knows what you can afford.
Having that pre-approval ensures you won’t miss out on being a contender for a home if you happen to see one you love and want to make an offer right away. Most listing agents won’t even entertain an offer without a pre-approval. Plus, it makes the initial house search easier when you know how much home you can afford.
You Shop for Shoes Online – Not Your Mortgage
It might seem easier – or more convenient – to shop for your mortgage online. But there are 3 big advantages to working with a local, reputable lender on what is likely one of the biggest purchases of your life.
- Local lenders know the market. Not only do they regularly work with local appraisers, title companies and agents, but they’ve also likely driven through the neighborhoods, walked the nearby parks and shopped in the local stores.
- You can meet with local lenders face to face. A mortgage can be complicated. It’s easy for misunderstandings to happen through email or over the phone. But when you can meet with a lender face to face (even if it’s virtual!), you can clear up a lot of that potential confusion.
- Local lenders are available if something goes wrong. If there’s an issue with your appraisal or closing, a local lender who has formed a relationship with you and understands your situation is more likely to be able to help you than a call center that may or may not be open.
There’s something to be said for working with a lender who cares about you – not just your loan – and who will walk you through the mortgage process, providing unequaled personal service along the way.
What to Know about Rates When Applying for a Mortgage
With so many factors determining a mortgage interest rate, it can be confusing to understand whether you’re getting the best possible rate. No matter what current interest rates look like, make sure you do your homework before sealing the deal.
We’re here to help make that process a little easier with these 4 things you need to know about mortgage rates:
1. It's a great time to buy a home – and keep in mind that waiting can be costly. When interest rates go up by just 1 percent, the cost of a home can rise by tens of thousands of dollars.
When comparing loans, it’s important to look at the APR (annual percentage rate) and interest rate – even if you’re quoted the same interest rate from different companies. The APR is the rate calculated when the fees associated with making the loan are added to the original loan amount. This is important because the fees charged can change from lender to lender, and the fees associated with the APR can vary as well, so the APR may not be the same even if the interest rate is. The APR shows you the true cost of the loan over the life of the loan.
Read this article for more about deciding whether to buy a home when mortgage rates drop.
2. It’s also important to ask about an origination fee – that’s the fee a lender can charge to process the loan. Bell Bank Mortgage’s no origination fee program can save qualified home buyers thousands because they’ll need less cash to close. (Keep reading to learn how to save for closing costs.)
If you’re talking to others about interest rates, keep in mind that the rate one person gets isn’t necessarily the rate someone else will receive. Many variables go into determining an interest rate, including:
- Type of loan
- Credit score
- Value of your home
- Home’s location
- Loan amount
- Down payment amount
- Length of loan
- Purpose of loan
How to Save for Closing Costs
Closing costs – the fees charged when you take out a home loan – vary greatly, but they average between 2% and 5% of the home’s purchase price. On a $200,000 home, that’s roughly $4,000 to $10,000.
That’s a chunk of change that can seem prohibitive, especially if you’re already burdened with car payments and student loan debt. But it doesn’t have to keep you from owning a home.
There are down payment assistance programs to help first-time homebuyers. You can also save on closing costs at Bell Bank Mortgage, which does not charge qualifying borrowers an origination fee.
Next, start saving as much as you can. These 4 tips can help you save $4,000 or more toward your closing costs in one year:
1. Pay yourself first
Set up your direct deposit to automatically transfer money into your savings account with each paycheck. Can you afford $50 a paycheck? That will give you $1,300 in a year if you’re paid every two weeks. How about $100 a paycheck for a savings of $2,600 in a year?
2. Use a “virtual piggy bank,” such as Bell’s ChangeSaver program
ChangeSaver rounds up every purchase you make and deposits the difference into your savings account. If you round up your purchases by $2, and you make 50 purchases a month, that adds up to savings deposits of $100/month or $1,200/year. Plus, Bell matches 5 percent of your ChangeSaver roundups, up to $250/year. That means Bell will add $60 to your $1,200 ChangeSaver savings.
3. Track what you spend
If you don’t track your spending or follow a budget, it’s too easy to impulse buy. If you have a budget, are there places where you can cut costs?
- Save $600 toward your home by forgoing cable for a year (estimating it costs $50/month).
- Invite friends over for a game night instead of going out. If you spend $100/month going out, you can save $1,200/year.
- Lunches at a restaurant once a week can cost you $30-$50/month. And if you treat yourself to one specialty coffee a week, that’s nearly $20/month. Pack your lunches, bring coffee from home, and save yourself $50/month (or more!)
4. Keep your goals visible
Going out to lunch or a movie can seem a lot more fun than brown bagging it or watching a video at home. But in the end, being able to pay your closing costs and get into a new home is a lot more fulfilling. If you feel deprived at not being able to treat yourself to a smoked butterscotch latte, it helps to be able to see and touch a tangible representation of your goals.
- Carry a picture of a house in your purse or wallet to remind yourself why you’re working so hard to save.
- Hang a goal chart, like a fundraising thermometer, in your home, so you can see and track your progress.
- There are also free cell phone apps, like Bell’s CardValet® program, that can help you stick with your budget. With CardValet®, you can set spending limits for general use and specify thresholds by merchant types to make sure you don’t go over budget.
Following all of these tips, you can save roughly $4,000-$6,000 in just 12 months. It will take dedication, but when you unlock the door to your new home, won’t it be worth the sacrifice?
* CardValet is a registered trademark of Fiserv, Inc.
Why Work with Bell Bank Mortgage?
Your loan is not just another deal to us. We understand it’s a dream of home ownership that could unlock a future of possibilities.
At Bell, we treat our customers how we would like to be treated. When you work with us, you’ll benefit from our highly competitive rates, wide variety of loan programs and reputation for exceptional service, integrity and on-time closings.
Every step of your financing is handled in house, which means faster answers, fewer headaches and peace of mind.
Built on a solid foundation of doing the right thing means we put our clients’ best interests first, always.