Real Estate

Home Affordability: How Much House Can You Afford?

If you’re in the market to buy a new home, you might be at a loss when it comes to understanding home affordability. In some neighborhoods, small homes are selling for prices that seem astronomical. In other neighborhoods, large homes are questionably low-priced.

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What gives?

Obviously, location plays a major factor in the housing market. Yet, this is only one small facet of how home values are determined. If you’re looking for a new house but aren’t sure what you can afford, we can help.

Keep reading for a complete guide on everything that affects home values and your personal affordability.

Your Finances

To find the right home for you and your family, you must understand how home affordability is measured. As you might have guessed, some features, like square footage, are fixed constituents. However, there are some things that are more fluid, such as your credit score.

will impact your home buying budget. A low credit score will limit how much money you can get approved for and what interest rates are available to you. Do not underestimate the importance of these factors.

Interest Rates

The interest rate you qualify for will impact your monthly payments and the overall cost of your home loan. For example, a 30-year mortgage for $250,000 with a 5% interest rate results in:

Monthly mortgage payments of $1,342
A total payoff amount of $483,139

As you can see, that’s almost double the value of your home (at the time of purchase).

Now, if we take the exact same loan and change your interest to 3%, your numbers change drastically to:

Monthly mortgage payments of $ 1,054
A total payoff amount of $379,444

Ultimately, by getting approved for a lower interest rate, you’ll have lower monthly payments and save over $100,000.

Length of the Loan

To further understand home affordability within the scope of your loan, let’s look at loan terms. Using the same mortgage as above, let’s examine the difference between a 30-loan and a 15-year loan.

With a 3% interest rate, as noted above, a 30-year mortgage will result in:

Monthly mortgage payments of $ 1,054
A total payoff amount of $379,444

If we take the same loan but change it to a 15-year mortgage, the results are:

Monthly mortgage payments of $1,726
A total payoff amount of $310,762

Clearly, your monthly payments will be higher. However, because you’re spending half as much time making interest payments, you’re saving $70,000.

Additionally, saving up for a sizeable down payment on your house can also lead to savings. In many cases, you can get better interest rates by attributing cash down on homes. This provides the lender with initial funding, which improves your credibility and allows them to offer lower rates.

Location

One of the most important factors that affect home affordability is location. The exact same home can have a vastly different price tag from one neighborhood to the next. Some neighborhoods are more appealing than others.

This can come down to:

Safety and security
Nearby amenities (parks and playgrounds)
School districts
Proximity to shopping districts
Generally maintenance, upkeep, and cleanliness
And more

Many neighborhoods maintain credibility and demand through homeowners associations. HOAs are tasked with maintaining the neighborhood’s reputation, safety, cleanliness, and security. Naturally, these neighborhoods are home to more expensive houses, not to mention the HOA fees one pays for living there.

Furthermore, homes in highly desired locations, such as Miami and Palm Beach will be more expensive. That’s because living in these types of towns comes with amazing perks, like being close to the beach. To get a better idea of your options, check out these homes for sale in Miami.

The Current Housing Market

As we mentioned earlier, the housing market is a contributing factor in terms of home affordability. For instance, a home might be valued at $200,000. During a seller’s market, however, the home could sell for upwards of $300,000.

Before house hunting, make sure you know the current housing market. In a buyer’s market, there will be a large number of homes for sale and not as many buyers. This makes it more difficult for sellers, who, in turn, will be willing to mark down their homes to get them sold.

In a seller’s market, there will be a lot of people looking for homes and limited listings. In this scenario, sellers have the upper hand and are able to ask for more money. It’s also likely that you’ll get into a bidding war with another buyer, which can increase your costs even more.

Home Square Footage and Property Size

Of course, the size of the home and the property it sits on will also impact home affordability. Larger homes come with more bedrooms, more bathrooms, larger kitchens, and bigger living spaces. Consequently, they also come with heftier price tags.

However, many homeowners are more than willing to pay more for sizeable homes because it translates to greater comfort, space, privacy, storage, and entertainment options.

The same can be said about the size of the property. A large backyard opens the door to appealing opportunities, such as:

Outdoor games and activities
Pets
A private play area for your kids
Backyard BBQs and parties
Additional buildings (sheds, she-shacks, workshops)
And more

By nature, bigger, more expensive homes, also come with greater expenses. This includes homeowners insurance, heating, cooling, electricity, water, gas, property taxes, etc.

Outdoor Features

Finally, let’s talk about the outdoor features that can influence home affordability. While many homeowners are happy to buy a home and improve it over time, you might want to buy a house that already has all the features you want.

Outdoor features are things like:

Garages
Shops
Sheds
Fire pits
Pools
Decks and patios
Fences
Awnings and gazebos
Outdoor kitchens
Etc.

These outdoor features and living spaces can add a lot of value and quality to your life. As such, they will raise the asking price of the homes that have them.

What is Your Home Affordability?

Are you thinking about buying a new home? If so, it’s vital to understand home affordability and the many things that can affect your costs. Take your time to assess your budget and the housing market before making an offer.

And if you’re looking to save money or find more advice on real estate, look no further. Stick around and read through some of our other articles to find more valuable insight and information.