How Much House Can You Afford?

For a lot of people, investing in home ownership is a good financial move. It can be the difference between paying your rent every month with nothing to show for it, versus slowly paying off a property you can call your own. 

Reasons to Buy

While buying a house is a good investment for many, that’s not necessarily always the case. There are several reasons someone may consider buying.

You know where you’ll live for the next few years

Are you planning to stay put for a while, or are you looking to make a move to pursue a career, education or something else? If you’re in a stage in your life where you want to put down roots in a certain location, buying a house can be a great idea. 

But if you know you’ll be moving in the next few years, you may be better off renting for now.

Generally speaking, buying a house should mean you plan on staying in your current locale for at least three to five years. This is the minimum amount of time it will likely take for you to recoup initial expenses like closing costs—usually about 2-5% of your loan.

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Buying a house is an investment

There are several reasons you might want to buy a house. Maybe you’d like to take your monthly rent and apply those funds toward a bigger living space, with a yard, to grow a family? If you can afford a house, homeownership can be the right choice for your preferred lifestyle. For some people, especially those who anticipate a move further down the road, it’s a good investment as well.

Building Equity

A recent Fed report shows that U.S. houses are seeing a drastic rise in value, with the value of homeowner stakes in their houses rising by 13 percent. For many Americans their house is the single biggest investment they own, so this spells good news for homeownership, but there is a caveat. 

For a lot of people this makes home ownership a great investment, if you plan on moving out of the family home when you’ve got an empty nest, or only intend to live there for a couple of years before you move. Homeownership becomes an investment if and when you successfully sell your house for a profit. 

No doubt there are plenty of other great reasons to buy a house, but a house is only properly an investment if you profit from its eventual sale, or plan to leave it to loved ones who can then enjoy it or profit from it.

So How Much House Can I Afford?

Whether you’re looking to buy your “forever home” or hoping to invest in a property for a relatively quick turn-around, you probably want to know how much house you can afford. To be clear, this doesn’t just refer to the square footage of a property, but the style, location and all the other features that make a house desirable.

Let’s take a look at a couple rules of thumb that experts have developed over the years to help buyers find a number for how much they can afford to spend on a house.

Rule of thumb #1: Keep Your Mortgage Below 30% of Your Gross Monthly Income

How much you can afford to pay for a house is directly related to how much income you bring in. This first rule of thumb says to keep your monthly mortgage payment to 30% of your gross monthly income.

The median gross monthly income in 2020 was $4,534. So if you were looking for a house, you would want to keep your monthly payments below $1,360, or 30% of your monthly income. 

Of course, there are multiple ways to arrive at that number. You could make a bigger down payment, which would lower your monthly payments, or you could opt for a 30-year mortgage rather than 15. 

Rule of thumb #2: Keep Total Household Debt Below 36% (Car, Credit Cards, etc.) 

This rule of thumb has the advantage of providing you a guide for not only your mortgage payment, but the rest of your household monthly expenses as well. In this rule, your total monthly debt altogether should not exceed 36% of your monthly income.

Let’s say you make $100,000 per year, putting your monthly income at just under $8,500. Your mortgage could be as much as $2,500 (30%). On a 30-year mortgage, that would put you at a $385,000 house. If you have any monthly debt payments, you would subtract those from the $2,500 and account for the difference. 

How to Calculate

We call the above “rules of thumb” for a reason. There are more precise ways to estimate your future mortgage.

Use a mortgage calculator to get your specific results

It’s essential to your calculation that you account for specific mortgage rates. Mortgage rates change constantly, but for 2021 it’s been somewhere between 3 and 3.5% for a 30-year mortgage or 2 and 2.5% for a 15-year mortgage. A simple search for “mortgage calculator” will bring up countless options, or you can try one of our favorites over at BankRate to find out exactly what today’s mortgage rates look like for home purchasers in your area. 

Now It’s Time to Save for that Down Payment!

One of the goals you can choose in Lasso is a house down payment. So all you need to do to start saving for a house is download the app (for free) and build a plan to see how to best become a homeowner. 

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Pre-order the app

The Lasso app is going to change the way you think about that upcoming house purchase. Click below to sign up for our early adopter group. 

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