Open Menu
Close Menu
How Much House Can I Afford? How To Calculate Your Home Affordability Feature Image
Posted on July 11, 2023 6 minute read

How Much House Can I Afford? How To Calculate Your Home Affordability

What's in this article?

How to calculate home affordability
How loan terms affect home affordability
Home affordability conclusion

Owning a home is the American dream. It’s one of the most significant purchases anyone can make that provides lifelong benefits that renting cannot give you. 

If you’re like most homebuyers, you’ll need to finance your home purchase. Before you get a mortgage, knowing how much in total expenses you can afford is critical. 

When window shopping for that dream house, consider all variables so as not to plunge yourself into enormous debts you can’t pay. Know your budget and stick to it; that’s where the home affordability calculator comes into play. 

In this article, we’ll help you answer the homebuying questions on your mind such as “How much house can I really afford?”

How to calculate home affordability

Luckily, you don’t have to be a mathematician to figure out what you can afford when buying a home. Consider the following to figure out how much home you can afford. 

Analyze your monthly take-home pay

It’s helpful to use the 30% rule to determine how much house you can afford. This rule advises that you spend no more than 30% of your monthly take-home pay (after taxes) on mortgage payments

Adhering to this guideline can prevent you from spending too much of your monthly income goes towards housing expenses.

Example: Let’s say your household’s monthly take-home earnings amount to $3,100. By applying the 30% rule, your monthly house payment should be no more than $930. This amount should cover all expenses such as the principal, property taxes, HOA fees, etc. 

Following this rule ensures that you have sufficient funds in your budget to pursue other financial goals. Whether paying off college loans, investing, or saving for your children’s college funds, you’ll have more flexibility and room to save money towards these endeavors.

Use a mortgage calculator

Homefinity and other online resources typically offer affordability calculators to help you estimate your monthly mortgage payment. Whether you have a home in mind or not, this calculator allows you to run different scenarios to get an idea of your monthly mortgage payment. Try different home prices, loan terms, and down payments until you find your ideal scenario. 

However, remember that the figure you calculate is just an estimate. Other factors to consider include property taxes and home insurance. Additionally, if your down payment is less than 20%, you must pay private mortgage insurance (PMI) fees. If the home you’re interested in is part of a homeowners association (HOA), you should also factor in those fees.

Don’t forget to factor in closing costs

When buying a home, it’s essential to consider the down payment and the closing costs involved. Closing costs are fees paid to your lender when you finalize your loan. Typically, these costs amount to 3% to 6% of the loan principal. They encompass various expenses, including appraisal, home inspection, attorney, and inspection fees.

Your lender is required to provide a closing disclosure before the scheduled closing which breaks down the costs to close on your loan. These costs should be factored into your overall home-buying budget. 

For instance, if you’re purchasing a $200,000 home, multiplying it by 4% would give you an estimated closing cost of $8,000. Adding this amount to your 20% down payment of $40,000, the total cash on hand you’ll need to purchase your home would be $48,000.

If you don’t have the additional $8,000 for closing costs, it would be advisable to delay your home purchase until you’ve saved up the extra cash or consider aiming for a slightly lower price range in your home search.

Consider homeownership costs

Owning a home is expensive. The cost of maintenance, repairs, and renovations can add up. It’s recommended to have an emergency fund that could cover three to six months of expenses in the event of a medical accident, loss of income, or any other unexpected scenario. Savings like this should be accounted for in your monthly budget. 

Renovations can also add up if you don’t budget for them. Buyers often purchase a home with the intention of making updates or additions. Make sure to set a budget for that project and work towards saving up for it rather than trying to get everything done as soon as you purchase the home. 

Save a more significant down payment

Your down payment affects how much home you can afford, your monthly payments, PMI, and even interest rates. The higher your down payment, the less financing you’ll need. That means lower monthly mortgage payments and a faster timeline to pay off your home loan. 

The most ideal down payment for a mortgage is 20% or more of the home price. While that amount isn’t specifically required with many loan products, anything below means that you’ll have to pay for private mortgage insurance (PMI). This annual fee is 1% of the total loan value. P

MI might change how much house you can afford, so include it in your calculations if your down payment is less than 20%. Saving up for a significant down payment will protect you from getting overwhelmed with a budget-crushing mortgage and paying thousands more in interest and fees.

Want more personalized rates?

Get customized rates tailored to your individual mortgage needs.

See Today’s Rates

How loan terms affect home affordability

The mortgage loan you choose plays a very significant role in how much you can afford to spend on a home.

Conventional loans are typically offered with a 15 or 30-year loan term. 

  • 15-year mortgage: As the name implies, a 15-year term means that you’ll pay your mortgage loan back for the next 15 years. Overall, you’ll pay less in interest but will have a higher monthly payment than the 30-year option.  
  • 30-year mortgage: Similarly, your mortgage will be paid back over the next 30 years. This means more years of paying interest but usually a lower monthly payment than other options. 

FHA loans

This loan is backed by the Federal Housing Authority (FHA) and was created to help out first-time homebuyers by offering more flexible requirements to qualify. The FHA loan allows for a down payment as low as 4% but requires a mortgage insurance premium (MIP) for the entirety of the loan.

VA loan

Guaranteed by the US Department of Veteran Affairs, the VA mortgage loan requires no initial down payment but comes with a funding fee. This mortgage loan is only available to current members serving in the military, veterans, or qualifying spouses. 

Home affordability conclusion

Deciding to buy a house comes with many questions and challenges. That’s why you should work with and get guidance from a dedicated professional with your best interests in mind.

At Homefinity, we meet and exceed your expectations and are available to answer all your questions and concerns. 

Get your customized rate quote now and start your journey to an affordable home.

Photo by RDNE Stock project

Copyright©2023 Homefinity. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all dollar amounts. Other restrictions and limitations may apply. Homefinity is not affiliated with any government agencies. Equal Housing Opportunity.