Everyone dreams of one day being able to buy that dream home. Whether it is that
oceanfront property for sale that you saw while on vacation or a ranch style home
out in the country, we each have a mental picture of the piece of real estate
that is perfect for us.
Unfortunately, cost often gets in the way of our ability to turn our property
dreams into reality. We all need to make a realistic picture of what we can
afford in terms of the total cost of a home and in mortgage payments before
we begin shopping around. That's what we are going to take a look at in
First of all, let's talk about the cost of the home itself. Today, many
people getting into the market for the first time may feel hopeless about being
able to afford any home at all. Houses that were selling for under $100,000
less than a decade ago are now being sold at triple that price, after the biggest
real estate pricing jump in history. Whether we are talking local real estate or homes in downtown Toronto, home prices are higher than ever.
Fortunately, many lenders have tailored their policies with this new reality
in mind. We're not just talking about waiving down payment requirements,
sub-prime lending, or other recipes for disaster, either. Most lenders are now
offering mortgage terms that run much longer than the historical average. While
it means you will be paying your house off for longer, it also means that you
can make much smaller monthly payments on a condo than they would
be on a shorter term loan.
That still means you have to come up with an idea about what you can reasonably
afford; this of course will be determined by your monthly wages. At this point,
make your current job the basis of your calculations. You may dream of getting
out of the factory and moving on to
graduate from law school, but until you have a job as a lawyer, you need to
use only your current pay to determine what kind of mortgage payments you can
Next, take a look at what kind of home you want. Having a base price on a piece of real estate will give you something to go on as you make the rest
of your calculations. Remember to assume a down payment of 15-20% when you are
determining the actual mortgage you will carry. After subtracting the down payment
from the asking price, you have an idea of what your total mortgage will be.
Now, figure out what your mortgage payments will look like each month. There
are plenty of different programs online to help you calculate a mortgage (use this mortgage calculator), and
they will include the interest rate you need to look for when actually applying
for the mortgage itself.
When you are looking at owning a home, remember that there will be more to
the cost than the price tag alone. You will have to consider the price per month
that you will need to dedicate to property taxes, utilities, insurance, and
maintenance. These are generally based on the cost of the house, so add them
by month to the total payments you have calculated.
Once you have that monthly figure, you will know how much you can afford by
comparing it to a percentage of your monthly income. Common wisdom states that
total house payments will be equal to 40% of one`s income. Therefore, if all
the factors mentioned above equal or are less than that 40%, you are looking
at what you can afford as far as a mortgage. You now know exactly what kind
of home you can feasibly buy.