Are you wondering how much home you can afford? There are several factors that come into play when banks calculate how much they are willing to lend you. The amount of money you make, your debts, and your credit score all play a part in determining the size of the loan you qualify for. In addition to these financial considerations, the type of home you’re interested in and the location also affect affordability. Keep reading to learn about all five of these important factors that affect home affordability!
Interest Rates
The economy has a lot of facets that all play a role in home affordability. Five factors that have a significant impact are interest rates, property taxes, homeowners’ insurance, energy costs, and availability of credit.
Of these five, interest rates have the most immediate effect on affordability because they affect both the price of the home and the monthly payment. A one percent change in interest rate can mean a $40 change in the monthly payment on a $200,000 loan.
Other factors like property taxes and homeowners’ insurance can also have an impact on affordability, but these two usually stay constant year over year. Energy costs may fluctuate seasonally, but again usually don’t change much from year to year. The last factor, the availability of credit, can have a big impact on affordability as well.
When lenders tighten up credit standards, it can make it harder for buyers to qualify for a loan and ultimately purchase a home.
All these factors taken together give you a pretty good idea of how affordable homes are in any given market.
The Down Payment
The size of your down payment is one of the key factors that will affect your home’s affordability. A larger down payment will generally mean a lower monthly mortgage payment and a lower overall interest rate. The less money you must borrow, the more affordable your home will be.
If you’re thinking about buying a home, it’s important to save up as much money as possible for your down payment. Even a small difference in the size of your down payment can make a big difference in your monthly payments, and ultimately how much you pay for your home.
If you can put a 20% down payment, that gets rid of the PMI in the loan. When you only put 5% or 10% of a down payment, or even 15%, then you are still responsible for making a PMI or Private Mortgage Insurance as additional payment towards the mortgage.
Salaries & Wages
Five key factors affect home affordability: Location, Housing type, and quality, Costs of operation and maintenance, Income and tax considerations, and Interest rates. Of these, salaries and wages are the most important factor income considerations. The current housing crisis has made it difficult for many people to afford a home, even with two incomes. It is therefore essential that you research salaries in your area before buying a house. Consider the cost of living in the area as well as the job market. Are salaries high enough to cover the cost of a mortgage and other associated costs? Will you be able to find a job that pays enough to cover these costs? These are important questions to consider when determining whether you can afford a home.
The Term of the Mortgage
The term of the mortgage is one of the five factors that affect home affordability. The length of the mortgage has an impact on the amount of interest you will pay over the life of the loan. A shorter-term mortgage will have a lower interest rate than a longer-term mortgage, but your monthly payments will be higher. You will also build equity in your home faster with a shorter-term mortgage.
There are pros and cons of having a shorter-term mortgage:
Pros: You pay less in interest, You can pay off your loan more quickly, and most of the payment is in principle.
Cons: Your payment is higher, and you lose tax advantages by paying less in interest.
The Property Taxes
While many factors come into play when considering home affordability, property taxes are often one of the most overlooked expenses. And yet, they can have a significant impact on your monthly budget. Property taxes are levied by local governments and can vary greatly from one area to another. In addition, they are typically based on the value of your home, meaning that they can go up or down depending on the housing market. All of this makes it difficult to estimate what your property taxes will be when buying a home. However, it’s important to keep in mind that they are a real expense that needs to be factored into your budget.
Conclusion
When looking at affordability, there are a few key things to remember that will help you make the most informed decision possible. Interest rates, down payments, wages, the term of the mortgage, and property taxes all play a role in affordability. By taking these factors into account and doing your research, you’ll be well on your way to finding a home that fits both your needs and your budget.
