How much home can I afford?
When you start the home buying process, the best 1st step is to examine your budget. You absolutely want to answer the question of “How Much home can I afford?” This answer is not easy. You don’t want to be house poor. You know, buying at the absolute limit of what your credit score and income history can afford. Buying a home at this limit is dangerous because it could tie up all your free funds and not leave you some “OH S$*T” money for emergencies.
When my wife and I bought our house last year, we bought a bit below our means. We knew that we had an old car that was going to need to be replaced soon. On top of that, our oldest leaves for college in four years. Once you determine your budget, you need to find out what your house payment will be. And even houses at the same price do not give you the same payment.
Houses with the same price are not the same
In big cities, there are the potential for multiple counties, multiple school districts, multiple Municipal Utility Districts, and multiple emergency districts. Each of these entities can, and usually does, collect a tax on a property. Each of these entities has their own debt size and therefore a different tax rate. In the Upper NW part of Houston (Tomball, Cypress, and Spring Area) the property tax rate varies from ~2% to ~3.5%. This affects the amount of money required for your escrow.
There is also the home owners insurance. Unfortunately this can be a shock too. In Houston, alot of the name brand insurance companies have a high risk concentration of homes. Meaning that they have insured more homes that are risky versus those that are not (flooding, hurricanes, etc.). With that in mind, when these Big Boys quote insurance for new policies, they ask for a larger than normal amount hoping to cover the potential loss and/or dissuade you from buying from them. Thankfully there are some regional carriers that offer comparable coverages for a lower cost.
How does all this affect my mortgage payment?
Great question! Most mortgage calculators only show the principal and interest payment. They don’t usually factor in the property tax and home owners insurance. Most of us take advantage of a low down payment. This also causes a mortgage insurance to be added in (if you have less than 20% down payment).
The closest estimate is a combination of all the factors above. If you are so inclined, you can add the property tax and insurance to the mortgage calculator. If not, reach out to me. I have a buyer’s worksheet I would be happy to share. This worksheet is a good start to help answer “What Can I Afford?”
How do I figure out all of these variables?
Well, you could do the research on every home you look at. Or you can pick a real estate agent that knows where to look for each of these things and can help. Either way, it takes a bit of effort (by someone) to help you figure out “What Can I Afford?) My first goal is to make sure my client is happy. Its to make sure that my client doesn’t regret his purchase, overspend on his purchase, or even be so house poor that the only thing the client can do is stay home because of no extra money.
If that is important to you, reach out to me and let’s talk over coffee!