Can You Afford to Buy a Home in Your City?

I am a big proponent on home ownership. But I not in favor of biting off more than you can chew. The average American needs $51,000 to be able to afford to buy a home of their own. Can you afford a home where you live?

Those who live in or near big cities — especially on the coasts — will likely need more money to be able to afford to buy a home of their own. However, there are some larger cities where you can buy a home even if you salary is less than $51,000.


How much house can you afford

As you can see from the table above, from Marketwatch, those who live on the left coast or in the northeast will likely need a lot more money in order to be able to afford a home. Your home purchase less the amount that you use as a down payment is the primary factor in determining your monthly mortgage. Typically lenders are looking for at least 20 percetn down. SO if you are buying a house that costs $250,000, you will need to have $50,000 as a down payment. That’s a sizable chunk of cash which few of us have sitting around; you will have to save for that. Along with the down payment, you need to be able to afford the monthly mortgage payments.

Those monthly mortgage payment are directly tied to your salary as that’s the primary, if not the only, source of monthly income. There are differing opinions regarding how much house you can afford. Before the 2008-2009 financial crisis and real estate bubble, lenders were willing to lend people much more than (I believe) they can afford. In recent years, lenders have reigned in their willingness to loan money.

How Much Can I Afford
As a rule-of-thumb, you should limit your monthly mortgage payments to 25 percent of your net wages. If your take-home pay is $800 a week, you can afford about $860 a month in monthly mortgage payments.

The calculation is $800 per week in net salary * .25 (one quarter of your net pay) * 4.3 (the average number of weeks there are in a month) = $860.00.

That $860 is the amount to be spent on all mortgage related expenses: principal, interest, taxes, etc.

That’s likely a mortgage of roughly $180,000, assuming a 20 percent down payment of about $40,000, that means that someone with take home pay of about $800 can afford a home costing about $220,000.

Source: Rik, Flickr

Source: Rik, Flickr

Can I Spend More Than That?
I strongly suggest keeping your mortgage payments at that 25 percent of take home pay level. Some people are willing to increase that expense to 25 percent of your gross pay. Some will even stretch further than that. I would rather keep your monthly payments at reasonable levels; I don’t want to become “house poor.”

One reason that people want to stretch their monthly payments is because their homes are likely to increase in value over time.I would rather wait until I have enough money for a sizable down-payment; enough to allow you to only have your monthly payment limited to 25 percent of your net pay.

There are many websites which can help you determine whether you can afford to buy a home. Redfin can show you how many (if any) homes are available in your area.

I like the idea of home ownership for most of us. Unfortunately, many Americans are unable (or unwilling) to save money.Many people have no savings at all. Owning your own home is essentially a forced savings account. Every month, when you pay your mortgage, you are making principal and interest payments; granted, early in your mortgage, the vast majority of your payment goes towards interest. The longer you stay in your home, the more money goes towards the principal. So you are gaining equity, just by paying your mortgage and each year, you home will likely increase in value. On average, homes increase by about 3 percent each year.

If you can afford to buy a house, I suggest buying one. If you can’t save up money for a down-payment until you can afford to have a reasonable monthly mortgage payment.



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