How Much House Can You Afford?
If you rent and have cash for a down payment, you can purchase a home. But what if you don’t rent? Here is the simplified version of what a mortgage broker will do for you.
Step 1: Annual salary ÷ 12
- What is your gross monthly income from all sources? If your annual salary is $75,000, divide this by 12 and you’ll see that your monthly income is $6,250.
Step 2: Monthly salary x percent you want to spend
- Brokers and financial planners will recommend that you spend anywhere between 25% and 36% of your monthly income on household expenses. We’re going to use 36%.
- $6,250 x .36 = $2,250
Step 3: Calculate your debt
- Add up your current monthly debt. ie. car or school loans, credit cards, and any other personal debt you may have. All of this added together gives you your total debt. Let’s say that these add up to $750 a month.
Step 4: Amount you want to spend – total debt
- Now, take that total debt and subtract it from the amount that you were willing to spend per month to get your maximum monthly payment:
- $2,250 – $750 = $1,500
Step 5: Monthly payment x12
- Multiply that house payment by 12 months, and you have $18,000 to spend each year.
Step 6: Annual payment ÷ interest rate
- Divide this annual amount by the current interest rate (we will use 10%, for example).
- $18,000 ÷ .10 leaves you with $180,000 available for a mortgage.
Step 7: Mortgage + down payment
- Take the amount you’ve calculated that you can afford to pay for a mortgage, add the amount of cash you have on hand to make a down payment, and you get your purchase price.
- Using the current example: The mortgage was $180,000 plus you have $20,000 on hand for a down payment -- so, you can afford to purchase a home for $200,000.