When you begin to look for your dream home it can be intoxicating walking through house after house, envisioning the future in each one, but it pays to keep your head out of the clouds when you’re contemplating taking on debt for thirty years. One important thing to realize is that you want enough money to live comfortably and a house payment within your means is vital to this decision making process. A simple rule of thumb is to remember that you want to spend only one week’s worth of income on housing. Most of the time, your mortgage is going to include a portion that goes to your escrow, and you want to include that amount in your calculation. Escrow usually consists of homeowner’s insurance and yearly taxes, and sometimes private mortgage insurance (PMI).
I’ve always used gross wages to calculate how much house payment I can afford. Others prefer to calculate your net wages. I think typically the bank or real estate agent want to put you into a bigger house and mortgage so guard yourself against this tendency, I know we went through this process when we were looking for our home that we’re in now. Had I been less financially savvy our mortgage would be much larger than it is now. Another rule I had was that we could afford $10,000 worth of house for every $100. If 1/4 of my income was $500 then I could look for home as high as $50,000. If $700 was one-quarter, then I could go as high as $70,000.
Here is a real life example:
My gross income from my “day” job is $3000 per month. $3000 divided by four is $750. My mortgage is $534.02. My mortgage breaks down as follows:
Principal & Interest $366.06
Homeowner’s Insurance(s) $55.67
Mortgage Insurance $42.40
City/School Tax $61.42
My net or take home pay is $2400, if I used the net then I would need to stay under $600.
Every since I was a young girl I dreamed of owning my own home and a piece of land. I think it was important to me from such a young age because we moved frequently when I was growing up, and I hated how everything changed. Neighborhood friends, teachers, school, would I have my own bedroom or have to bunk up with my sisters? I also knew that meant I had to have good credit and I set out to establish that as soon as I moved out into my own place.
I’ve bought two homes by mortgage, but one time I borrowed money from my grandparents to buy a mobile home and paid them back with interest. Something similar to this is the option to rent or lease to own home ownership.
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