Are you at that point of your life where you’d like to move out of your apartment and into a home of your own? While living in a house may sound fantastic, it also comes with a huge price tag.
Can you afford to buy a house?
This is the most important question you can ask yourself before jumping into a brand new mortgage. You’d be surprised how many people don’t take this seriously!
Buying a house is a huge decision which will impact you not just now, but for years to come, especially if you want to buy a house for the long term. The terms of the mortgage are as important to consider as the price itself.
Depending on the type of interest rate you get and what happens in the future with the housing market, the house you can afford now may or may not be affordable in the long run.
When asking yourself whether you can buy a house or not, the two things you have to determine are your monthly income and your monthly expenses.
Your income is obviously pretty simple, unless you’re self employed and your income varies. If it does, you should calculate everything using the bare minimum income you might receive. Your expenses will include your mortgage payments, your homeowners insurance payments, your property tax, and the slew of expenses you’re probably already paying such as food, gas, other insurance, car payments, any other existing debt, household supplies, medical expenses, and so on.
What you calculate now will give you some notion of what you can afford, though not a complete picture since the future entails change and unpredictability. Changes in your income and expenses are not just possible, but likely. With that in mind you’ll want to give yourself a fair amount of buffer for change.
You can start your search by using an online calculator which will give you a vague idea of the threshold you should be looking at for your monthly mortgage payments and the total price of a home. For every house you seriously consider buying, though, you’ll have to run all the numbers yourself. Your calculations may determine whether you are happy and secure in the future or facing foreclosure and struggling to eat every month.
One final thing to take a close look at is what type of interest rate you accept in your loan terms. Fixed and adjustable interest rates have advantages and disadvantages, though one advantage of fixed rates is that they are predictable.
Adjustable rates are unpredictable and subject to the changes which affect the housing market. This means they could go up, could go down. In recent history they did go up—way up—which is one of the main reasons why so many homes are now in foreclosure.
What are adjustable mortgage rates good for?
For short-term home buyers who plan to be in a house for just a few years, they can reduce interest rates to a fixed, low rate. After a few years however that rate is floated against the market index, so after that there are no guarantees. Long-term buyers can enjoy more predictability and certainty with a fixed rate.
Buying a house will alter the course of the rest of your life, so choose wisely. If you need to wait a few years or get a smaller house or a house in a rural area, that’s not necessarily the end of the world. It’s better to do that than to try and buy a home which you won’t be able to afford in a few years.