One of the most important considerations when you buy a house is whether or not you can really afford it. As many people discovered during the financial crisis and subprime mortgage meltdown, they really could not afford the homes that they bought. It turned out that when mortgage rates re-set, all of a sudden the house payments did not fit the budget.
When you buy a house, you want to make sure this does not happen to you. Here are some things to keep in mind so that when you buy a house, you know you can afford it:
Get a Fixed-Rate Mortgage Loan
Instead of getting a mortgage with a low teaser rate, or getting an interest-only loan, get a more traditional fixed mortgage. Your mortgage payments (of principal and interest) will not change over the loan term, and when you buy a house you know that you can afford that house with the terms you end up with ― and not because of some “creative financing” that provided an artificially low payment to start with.
Remember to Consider Other Costs
When you buy a house, you have to figure your payment is more than just repaying principal plus interest. Consider property taxes, mortgage insurance, and homeowners insurance. Additionally, if you buy a house without a 20% down payment, you may have to pay for private mortgage insurance as well. All of these expenses (plus closing costs, utilities, and maintenance) should be considered when you think of your monthly obligations.
Keep Your Home Costs to About 30% of Your Income
As you buy a house, remember that a general rule of thumb is to make sure that your total housing costs do not exceed one-third of your income. It is best to figure this based on your net income (what you bring home) rather than your gross income. So, if you make $50,000 a year, your monthly income is $4,166.67. Your housing costs should not exceed $1,250 a month in order to remain within this rule of thumb.
Consider Your Other Debt Obligations
You should also think of your other debt obligations when you buy a house. Do you have credit card debt or outstanding student loans? While it is not a horrible things to buy a house before your other debt is paid off, you should make sure that you have the situation under control, and that you can afford the cost of owning a home on top of meeting your other obligations. Try to keep your total debt (mortgage + other obligations) to 36% of your income. In our example above, that means that your mortgage payment and other debt payments should total no more than $1,500 a month to keep you out of danger.
Bottom Line: It is a big financial commitment to buy a house. Make sure you are truly in a position to afford it.