While the U.S. economy overall is still reeling from the COVID-19 pandemic fallout, certain sectors of it are booming – and real estate just so happens to be one of them. Thanks to low inventory, sellers are commanding more than market prices for homes – which is good news for them. But thanks to record low interest rates, buyers are able to lock in mortgage loans at much more reasonable prices when you consider the total cost of ownership, so there’s good news for buyers to.
And when you’re in the market for a new home – and perhaps even engaging in a price war with like-minded buyers over exceptional inventory – it can be tempting to continue to increase your offer to get the home of your dreams.
Needless to say, this isn’t always smart. You never want to end up paying too much for a home, even if you’re approved for the financing. It’s why the experts advise you follow a key pair of rules that dictate how much home you can afford so you’re not coming up short later. Here’s a closer look at each of these rules:
Rule No. 1: The Annual Salary Rule
How much do you make per year? According to some financial specialists, your total home mortgage shouldn’t be any more than three times your annual salary. So, for example, if you make $60,000 per year, you shouldn’t take out a mortgage for anything more than $180,000. Now, keep in mind that if you live with a spouse or partner, you can also take into consideration their salary when you apply this rule. For instance, if both you and your spouse make $90,000 combined, then that’s $270,000 worth of a home mortgage that you can swing.
Rule No. 2: The Monthly Income Rule
While the annual salary rule is a good starting point, it shouldn’t be the end point. That’s where the monthly income rule also must apply, as it considers not just your monthly mortgage payment, but other home-related expenditures like utilities, insurance, taxes and more. Generally, you don’t want to spend any more than 50 percent of your monthly income on home-related expenses. So, for instance, if your gross income is $6,000 per month, you don’t want to spend any more than $3,000 of it on your mortgage and other mortgage-related expenses. This ensures that you have plenty of money left over each month for other living necessities, and then some for savings and more.
Remember, just because you qualify for a certain mortgage amount doesn’t mean that you should take out a loan for up to that amount. Follow the two rules above and prepare to purchase your next home much more responsibly. Even during these times when the housing market is hot, you don’t want to buy a home that you can’t adequately afford.