As you think about buying a home, the question inevitably comes up: just how much house can you afford. Here's how to start thinking about that answer, but we recommend speaking with a financial advisor to really make the right choice for you.
First, let’s make sure this is the right question. Most people opt for the upper end of their affordability range, but there’s no rule requiring you to get there. Any savings you get from buying a less expensive house allows you to save for and spend on other goals (vacations, hobbies, boats, second homes, college, retirement!), so keep that in mind as you conduct your search.
When you do think about how much you can afford to spend on a house, you usually want to consider how easily you can afford the combined monthly mortgage payment, property taxes, homeowners association (HOA), and homeowners insurance fees. A good rule of thumb is that 28% of your gross income should cover all of those costs and that 36% of your gross income should cover all of your debt (including student loans, credit cards, and personal lines of credit).
For example, let’s say your household earns $200,000. You should aim to keep your housing costs below $56,000 ($200,000 x 0.28) or $4,667 per month. Working backward from that, at a 4% interest rate on a 30 year mortgage with $100 per month in insurance and property tax of 1%, you can afford to buy a home worth about $946,000 with a 20% down payment. We made a lot of assumptions there, to look at your personal situation, schedule time to speak with a Farther Financial Advisor.