Sandra Gilpatrick, CFP ®,CDFA™

What To Consider In Home Affordability

One of the most common questions I’m asked is,“how much can I afford to spend on a home? “. I plan on writing about buying versus renting, another popular query, in a future blog. But after you’ve made the decision to purchase property, what should you consider? A first step is to look at a home affordability calculator, like the one on my site .However, this is just start of the thought process. There are many other variables I will highlight that will bring this initial calculation lower.

You may be able to afford the mortgage payment shown on a general calculator for a 30 year mortgage. But, do you really want a 30 year mortgage? If you are making a home purchase in your 40’s, you could be into retirement and still be carrying an expensive fixed expense of a mortgage payment. I typically suggest trying to bring down your fixed budget expenses as you are gearing up for retirement, assuming you are turning off your biggest income stream. An even bigger consideration may be the actual cost of your purchase with 30 years of interest payments. The shorter your years of interest payments, you could save a bundle. Here is an example using my site calculator :

For illustrative purposes, if you borrowed $500,000 for 30 years (360 months) at a 4% fixed rate, you’d pay $2387 monthly and the total interest over the life of the loan would be $359,348. If you add that to the $500,000 you borrowed, you’re really looking at a $859,348 expense. Contrast that to a 15 year (180 months) 4% fixed rate mortgage for $500,000 and you come out with a monthly payment of $3,698 and over the life of the loan $165,719 of interest payments to the lender. Adding interest to your $500,000 loan, you’d be paying around $665,719 at the end of the 15 years. That is a big difference!  I kept this example simple. However, also keep in mind you may be able to receive a lower borrowing rate for a shorter duration. So that hypothetical 4% fixed rate that might be offered for 30 years, may be only 3.85% as an example for 15 years, potentially saving you more on interest costs. So, why is a 30 year mortgage so popular? I think it’s because the monthly payments are lower. This is another reason to consider a lower priced home, to be able to afford the higher monthly mortgage payments on a shorter term loan. If you want to factor in estimates for tax savings on interest, there is a spot for that on this calculator.

After the expense of borrowing with a mortgage, you still need to consider important ancillary costs including real estate taxes, insurance, utilities, furnishings, landscaping/snow removal, condo fee (if applicable) and maintenance costs.  Do you love high ceilings? Know that could add to your heat bill. Enjoy the charm of living in a historic property? Your costs to maintain an older structure should be more costly than new construction. Having owned an older condo for over 12 years in Boston, I have tested with accuracy the rule of thumb on spending 1% - 5% of the value of your home on maintenance costs annually.

When you look at borrowing funds from a lender, they will measure your Debt to Income Ratio. Why? The lender wants to ensure you’ll be able to cover your existing debts and still pay them the mortgage. They will look at your total monthly debt obligations (including proposed housing) and divide your gross income and see if it is less than 36%. They will also look at how much of a down payment you will provide. If you can get together at least 20% of a down payment you can save the cost of PMI (Private Mortgage Insurance), which is an added expense.

There are countless expenses involved with being a home owner. Why do it? You have the opportunity to build equity and potential appreciation. It is another diversifier in your overall wealth to own property in addition to more liquid assets like your investment accounts. Keep in mind, if you can manage to spend a smaller percentage of your income, you’ll have more money to go towards other parts of your budget. Whether that is translated into increasing your retirement contributions or even traveling more, you will have the opportunity to decide what is most important to you.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.