Every Highlands Ranch real estate agent will tell you that you should always set a budget before starting to look for a home. Lenders will review your information and tell you how much you are approved to spend on a home, but you shouldn’t take their word for it. Instead, sit down and figure out how much you can afford to spend on a mortgage payment every month, and go from there.
So, how much should you spend? It depends on who you ask. Many financial experts recommend that you spend no more than 28% of your monthly income on a mortgage payment. For example, if you have a monthly income of $3,000, it’s recommended that you don’t spend more than $840 on a mortgage payment. If you use this method to calculate how much you can afford, you should remember that 28% is the max. The less you can spend, the better. Other experts are more conservative, recommending that you cap your mortgage payments at 25% instead of 28%. Learn more about mortgage basics and loan eligibility
Even though many experts recommend this method, it doesn’t work for everyone because it fails to account for any other expenses you may have. For example, if you have to spend $1,500 a month paying off credit cards, car payments, and student loan debts, this only leaves you with $1,500 for a mortgage payment, groceries, utilities, and other expenses. In this scenario, spending $840 on a mortgage may make it difficult to pay your other expenses.
If you have a lot of expenses, you may want to ignore the 28% method. Instead, subtract your total expenses from your total income and figure out how much you have left to allocate to a mortgage payment. For example, if you have a monthly income of $4,000 and have $2,100 in all other expenses, that would leave you with $1,900 to allocate towards a mortgage payment and your savings.
Regardless of which method you choose, keep in mind that there are four things tied into a mortgage payment, including the principal, interest, property taxes, and homeowners insurance. If you put less than 10% down on the purchase of your home, the lender may also ask that you pay private mortgage insurance, or PMI, every month. Many people make the mistake of only factoring in the principal and interest when calculating mortgage payments, but this will not give you an accurate estimation. When calculating how much you plan on spending, make sure you are factoring in the cost of the principal, interest, taxes, and insurance.
Remember, you should calculate how much you can afford to spend instead of relying on what the bank tells you.
Now that you know how much you can afford to spend, it’s time to find a home within your budget! Our agents can help you find the home of your dreams without breaking the bank. Contact us
to talk to the experienced real estate agents at Colorado Home Sales today.