Looking for an early Hanukkah or Christmas gift? Well here’s your very own, easy to use, “How Much House Can I Afford Calculator” !
Before you start looking to buy a home and take out a mortgage, you have to do your homework and this calculator will make that an easy task. If you don’t, you could very well find yourself being pressured by your real estate agent into making offers on homes that you can’t afford and have no reason to even see.
You can download the spreadsheet here.
Take a minute to download the file. Then I’ll walk you through how to use it yourself. You will see the calculator already has numbers populating the fields. Don’t worry. Just input your own numbers as instructed and you’ll see the magic happen.
1. Net Take Home Pay.
This is the amount of money you bring home on a monthly basis – after tax. Make sure that if you get paid twice a month to double the number before you input it. Again, we are looking for a monthly amount. Input your number where the $8500 is found.
2. Cost of Living
Input what you spend on your cost of living for everything other than housing. This would be food, cable, utilities etc. It may be difficult for you to derive that number unless you use a budget tracking software package like YNAB (You Need A Budget) or something similar. If you don’t track your spending, just use your best estimate – but start using a tracking program as soon as possible. Knowing what it cost you to live is one the most important numbers you need to have in order to be financially successful and make important decisions like this while avoiding real estate scams.
3. After-Tax Savings
Enter the amount you save – after tax – for savings. This is not your contribution to your retirement plans at work. Remember, the first number we input was after-tax net take home pay. That presumably is the amount you take home after all deductions are taken out – including deductions for the retirement plans.
4. Annual Housing Costs.
These are numbers you are going to need to get from your realtor. They will be estimates because the property tax, insurance and repairs will be based on the property itself.
For repairs, you should just use an educated estimate. Your Realtor should help provide some insight here.
5. This number is automatically calculated for you. In other words, the spreadsheet will calculate how much you’ll spend for tax, insurance and repairs and break it down on a monthly basis. That’s alright. You can thank me later.
6. You don’t have to do anything to derive this number either. The spreadsheet calculates the true amount you can afford to spend on housing. I have purposely left out the tax benefits you accrue by owning property. In effect, the tax benefit of writing off the mortgage interest expense reduces the cost and allows you to spend more every month.
But I’ve left out this benefit because you have to spend more on repairs when you own property. Even though I’ve made an allowance for repairs, I just like to be extra careful. You won’t ever be angry at me for suggesting you allow for more contingencies…..trust me on that one. Let’s now look at the second half of the spreadsheet:
For number 7, input the current interest rate of the loan and number of payments. You can run this for a 30 year or 15 year mortgage. If you select a 30 year loan, that means you’ll be making payments for 30 years. If you are making payments at the end of the month, put “1” in the next field. If you will payments at the start of the period, put a “0” instead.
Now you know how much of a mortgage you can afford. That’s a good start. If you have enough of a down payment to bring your mortgage down to this amount, you are in good shape. So, the example above demonstrates that you can afford a mortgage of $630,000. If the bank requires a 20% down payment, you simple divide $630,000 by 80%. The result is $787,500. The difference between the two is $150,000 so that’s the amount of down payment you would have to come up with in order to get the bank to make the loan to you.
If you have less than $150,000 to allocate for the down payment, it’s even easier to determine how much house you can afford. Simple take the amount you do have and divide it by .2 because that’s the amount the bank will be willing to lend you.
So if you have $100,000 saved up for a down payment for example, divide it by .2. If you do so you’ll see that the result is $500,000. That’s the amount the bank will loan you if you have $100,000 to put down. You can afford a larger loan but as I said, nobody ever went broke by borrowing less than they could have.
How did you decide how much house you can afford? Did you just take your Realtor’s word for it? Did it help or hurt you?