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How much House can I Afford? Budgeting Basics!

How much House can I Afford? Budgeting Basics! How much house can I afford?

So, you are just starting the search process and you want to know how much you can spend on a home? Well, if you have a credit score over 740 the general rule of thumb is that a bank will lend you 4.5 times your annual salary. Like with many good things, just because you CAN doesn’t mean you SHOULD. The same way I shouldn’t order an extra large ice cream because I know it will make me sick, you shouldn’t borrow the ENTIRE amount a bank will lend you or you could end up house poor.

House Poor?!? Now that sounds scary, and it is! If you end up spending too much on a home it could have a major impact on your lifestyle – limiting travel, dining out, and even how much you can spend on groceries. So, what can we do to avoid this?

Step 1: 

Figure out what kind of down payment you have. This is money you are willing to put down on a home, and it should not be all of your savings (Oh and don’t forget to set a little extra aside for furniture)! Then speak with a knowledgeable mortgage broker to understand what that amount will mean for your loan. For example, will you have to pay points or a higher rate with just 10% down versus the typical 20%? And, will you get a significantly lower rate if you put 25% down? During this call the broker will be able to give you a ballpark estimate of the current rates, which will help you in the next step of the budgeting process.

Note: If you don’t know any mortgage brokers, this is something your real estate agent will be able to help you with. They should also be well versed in the basics of the mortgage market in case you want to have a conversation with your agent before speaking with a mortgage broker.

Step 2: 

Come up with a monthly budget that you feel comfortable spending on the very basic principal and interest. Keep in mind this does not include property taxes, insurance, utilities or the condo fees/rainy day fund you should pay into for unexpected repairs you might need to do on your new property. Once you have this number worked out, take the estimated interest rate that you got in step one and use a reverse mortgage calculator to determine your purchase price.

Step 3: 

Add in the cost of insurance and property taxes to make sure the total cost still falls within a comfortable zone for your purchase. Depending on the towns in which you are looking to buy, tax rates can vary significantly. For example, in Cambridge the 2020 residential property tax rate is $5.75 per thousand of assessed value and you get a residential exemption. Compare this to Acton, where the residential property tax rate is $19.37 per thousand. If you are not yet sure what community you want to live in, but want to do a back of the envelope calculation, $11.50 per thousand is a reasonable stand in. As for insurance, you can use any of the online tools, but it is always more accurate to talk to an agent. Pay special attention if you are looking for a house on the water, as flood insurance can get very expensive very quickly! 

Congrats! You now have your budget! Doesn’t it feel good to be #Adulting? Now, in order to stay in it, make sure you are consistently aware of any condo fees, property taxes, flood insurance and other costs associated with a home you are considering buying. Your buyer’s agent is a great resource here and should be able to help you with all of this— We want to help you stay in your budget! 

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Kenda Coleman

Kenda Coleman is a Broker Associate with the Coleman Group.