How Much Home Can You Afford?

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It is believed that most people can afford a home two and a half times their annual income. This is a handy guideline, but the way interest rates vary, current thinking relies on how much you have saved for a down payment and closing costs, how much of a monthly mortgage payment you can afford and how much you need per month to meet other responsibilities.

Down payment and closing costs

Saving money for the down payment and closing costs is usually the hardest part of preparing yourself to buy a home. Because a down payment is typically between five and twenty percent of the purchase price of your home and closing costs are around five percent of the purchase price, it is a good idea to find out how much money you have available. This money could be from:

• Checking, savings and money market accounts
• Cash value of your life insurance
• Stocks and bonds
• Resale value of any personal property
• Gifts from parents or other relatives

Once you know what your assets are worth, figure out what your expenses total. Expenses might include:

• Utilities
• Charge account balances
• Insurance premiums
• Auto and/or school loans
• Federal, state and local taxes

Don’t forget to consider moving fees, home decorating costs and any other upcoming expenses – you don’t want the down payment and closing costs to deplete all of your savings.

When you subtract your expenses from your assets, the difference will be what you have to use for a down payment and closing costs.