Are you in the market for buying a house? Or maybe you’re looking to move and you’re wondering, “Now really, how much house can I afford?“. The answer isn’t always easy because it’s a little different for everyone. But with the tips below, you’ll be able to get a quick idea of:
- If you should even be buying a house in the first place
- How much house you can actually afford
How Much House Can I Afford??
Alright, I’m going to make this really easy because honestly, this isn’t nearly as complicated as everyone makes it out to be.
I know you’re asking “How much house can I afford?”, but sometimes people ask this when in reality they should be asking, “Should I even buy a house?” I find that more often than not, the answer to this question is, “No”.
Do NOT buy a house if…
- You’re not out of consumer debt
- You don’t have an emergency fund
- You’ll probably move soon
- Your life situation will change
- You travel a ton
- You’re just plain irresponsible
If you still have consumer debt (credit cards, car loans, student loans, etc.) and don’t have an emergency fund set up, your house will be a curse to you. Houses are expensive and they always come with surprises. If you’re broke to begin with and have very little savings, your house will suck you dry. DO NOT buy a house.
If you travel all the time, are irresponsible, or will likely move in less than five years, then don’t buy a house! Houses require upkeep and if you’re not around it will just be a drag on you. And if you plan on moving soon, why spend all your hard-earned money on broker’s fees, closing costs, and interest payments? It just doesn’t make any sense!
Stop asking, “How much house can I afford?” and instead, start asking yourself, “What’s the cheapest rent I can possibly get right now?”
How Much House Can I Afford? The Quick, Easy Answer
Where do people typically go if they want to know how much house they can afford? To the bank of course!
But is this wise?
…but why not?
The bank wants to stretch you as much as they possibly can financially so that they can earn the most money, not you. If you ask the bank how much you can afford, you’ll be left strapped for cash for the next 30 years, and it will be nearly impossible for you to build a wealthy future for yourself.
Where’s the next place people go to figure out how much house they can afford? To mortgage calculators online (one may have even showed up on this page…)…. Well guess what, these all lead back to the banks! So stay away from them too!
What you want is a quick, easy answer that will enable you to buy a house that’s reasonable for your income.
And here is your answer…
“How much house can I afford?” — one that’s twice your annual income.
What’s the Math Behind This Answer?
For all you math nerds out there and for those that might just be new to me (and don’t trust me blindly yet ;)), here’s the math behind the simple answer.
I recommend that people get a 15-year fixed loan with a payment that’s no more than 25% of their take-home pay. This way people won’t take debt into their retirement, and they’ll have enough cash while they’re paying the mortgage so they can actually enjoy their lives.
So, if you have a $50,000 a year income, your take-home pay is likely $35,000 a year (fricken Uncle Sam….), or $2,917 a month. To live comfortably (and you know…to do things other than sit in your house and stare at your expensive walls), I’d like to see you have a house payment that’s no more than 1/4 of that — or $729.
According to my quick answer above, you should be able to afford a house that’s two times the amount of your annual salary. In our case here, that’s $50,000 x 2, which equals $100,000.
And sure enough…
- at a 3.5% interest rate,
- over 15 years,
- you’ll have a payment of $715 on a $100,000 mortgage.
So if you make $100,000 a year, your mortgage should be no more than $200,000…and so on and so forth.
Do the math with your household income and quickly answer the question, “How much house can I afford?”
How Much House Can I Afford? Keep It Simple
Knowing what you should spend on a house is really simple – just keep it within double your salary. That’s it, people! It’s really not any more complicated than that!
Don’t go out there and start looking at houses that are way out of your price range or that have “creative financing”. You’ll just get yourself into trouble, and you’ll hate yourself in the long run.
Repeat after me:
- 15-year fixed loan
- Double my salary
That’s the answer and you absolutely won’t regret it!
“How much house can I afford?” What was your answer to this question?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.