How Much House Can You Afford?

How much house can you afford has always been a tricky question to answer. The easy answer is whatever the lender will lend you, but that should only be a very small part of the equation.

Your monthly housing expenses include many pieces, not just the mortgage, but also taxes, home owners’ association dues, insurance, maintenance and repairs, electricity, gas, water and other utilities. Also, remember that if you are a renter you are also paying all of these things, they are all just wrapped up into one number called “the rent.”

Once you figure out how much all of these things will cost you on an average monthly basis, including contribution to an emergency fund so that you can cover more unusual expenses, how much do you have left over? What do you like to do in your free time, and how far are you away from work? What kind of car do you drive, and how much longer will that car last? If you choose to live 45 minutes away from work and your social hub, and you drive a gas guzzling SUV, you could end up paying $500/month or more in gas. You may also get less years of life out of the SUV, and it may need to be replaced sooner. Do you like spending your weekends cutting the grass and trimming the hedges? If not, you can add on another $80/month during that time to pay someone else to do it. If you like to have dinners with your friends, don’t become house poor. Otherwise, you’ll be hosting a lot more dinner parties, and that’s only if you can convince all of your friends to drive 45 minutes to come and eat hot dogs.

There is no simple answer to how much you can afford. You need to have a detailed budget and all of the “what-ifs” covered. You also have to prioritize the importance of various aspects of your life and decide what things you want to be close to and what things you want to spend money on. If you thrive on being social and having a low maintenance life, you might want to find a smaller place close to downtown. If you crave space, a garage and want to plant a veggie garden, head to suburbia.

It’s great we have so many choices!