July 29th, 2018 1:34 PM by Jackie A. Graves, President
How much house can you
If that question is on
your mind, you're in good company. The spring buying market is here, and the
housing market remains strong across most of the country.
Home prices continued to
climb in January, rising 6.6% year-over-year nationally, according to
CoreLogic's latest Home Price Index.
House prices in most
markets have now recovered most or all of the value they lost when the housing
bubble burst in 2008.
That means bidding wars
for desirable homes have become common again, putting pressure on buyers to
It also means now is the
time to take a step back: The fundamentals of wise homebuying never change.
It's all about figuring
out what you can afford — based on how much you can reasonably borrow and the
amount you have for a down payment — and then sticking to that budget.
How much house can you afford? Follow these 5 smart moves to find out.
You'll know exactly what
you should spend on a place to live and not wind up house-poor with a bad case
of buyer's remorse.
Smart move 1. Determine how much you can afford to
For many years,
homebuyers seeking a mortgage have been well-served by what's called the 28/36
Maximum housing costs
We calculated how the 28%
rule works out for various incomes. If you have one of the incomes below,
here's the maximum you should spend.
Monthly housing limit
It says your total:
Monthly housing costs,
which include mortgage payments, insurance, property taxes and condo or
association fees, shouldn't exceed 28% of your monthly gross income.
Monthly debt payments,
including credit card bills and student loans, shouldn't exceed 36% of your
It's easy to put these
guidelines to work.
Just enter your monthly
income, bills and projected housing costs into our mortgage calculator, and it determines exactly how much you
can afford to borrow and the monthly mortgage payment you can reasonably
A key factor the
calculator needs to know is how much your mortgage will cost.
Home loans remain a
bargain, historically speaking.
The average cost of a
30-year fixed-rate mortgage — the most popular way to finance a home — is
RATE SEARCH: Compare
the lowest mortgage rates.
How debt limits what you
And remember, it's
the average cost of financing a home. Savvy borrowers with
decent credit can almost always pay a quarter to a half of a point less.
Spend a few minutes
searching our extensive database for the best current mortgage
rates from dozens of lenders in your area to get a good idea of what
you can expect to be charged.
An online real estate
listing for the size and type of home you hope to buy can provide property tax
and insurance costs you'll need to get an estimate of how much you can afford
Smart move 2. Add up how much you have for a down payment.
The bigger the down
payment, the bigger the house you can afford to buy.
For most buyers, the down
payment comes from two sources — savings and the equity they've built up in
their current residence. (Equity is the current market value of a home
minus what you still owe on mortgages.)
Ideally, you'll be able
to make a down payment of at least 20% to avoid paying mortgage insurance.
And options are available
for lender-paid or discounted mortgage insurance, including programs from
Fannie Mae and Freddie Mac, the government-created lending institutions, that
also will let you use a monetary gift for a down payment. A good mortgage
broker can run you through the possibilities.
"I'm getting loans
approved today that would not have been approved a few years ago," Merrill
If you're struggling to
qualify for a conventional loan, another option is a government-backed FHA loan, which requires down payments of as little as
3.5%, or a VA loan, which can require no down payment at all.
Smart move 3. Choose wisely if you tap retirement accounts for a down payment.
Taking money out of
retirement plans for a down payment is not ideal.
But we know that many
families have most, if not all, of their savings tied up in individual
retirement accounts (IRAs) or 401(k) accounts where they work.
If that's the case, tap a
Roth IRA or Roth 401(k) plan first.
Because contributions to
Roth plans are fully taxed before they're made, you can withdraw what you've
put into those accounts at any time without incurring penalties or additional
If you've held a Roth IRA
for at least five years, you can withdraw an additional $10,000 in earnings to
buy or renovate a first home without paying any penalties or taxes.
But since contributions
to these accounts are tax-deductible, you'll have to pay income tax on
withdrawals and a 10% penalty above the $10,000 limit until you reach age 59½.
traditional 401(k) plan is the last place you should turn for a down payment.
Such "hardship withdrawals" are fully taxed and incur a 10% penalty
until age 59½.
The better option is
taking out a loan against your 401(k). You can usually borrow up to $50,000 or
half of the value of the account, whichever is less. Your employer can give you
up to 15 years to repay the loan if it's for a home purchase.
Monthly payments are
deducted from your paycheck. The interest you pay, generally a couple of
percentage points above the prime rate, goes into your retirement account.
Smart move 4. Calculate an affordable purchase price.
Add how much you have for
a down payment (from Smart moves 3 and 4) to the maximum amount you
should borrow (from Smart move 1), and that's the amount you can
afford to spend on a house.
Don't hesitate to revise
this estimate as you shop for houses and mortgages.
Has a fixer-upper popped
up on your wish list? If so, you probably need to reduce the size of your down
payment to have more cash available for renovations.
Do the homes you're
looking at have lower property tax bills, or higher association fees, than you
expected? Have you found the perfect lender offering a lower interest rate?
Go back to the mortgage calculator, and revise your borrowing
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