How Much Mortgage Can You Afford in California?

Homeownership should make you feel safe and secure, and that includes financially. Be sure your home loan fits your budget, and carefully consider how much mortgage you can afford in California. Use these four methods to help you estimate that amount.

Create a Detailed Budget (Seriously)

There’s an old rule of thumb that says you can typically afford a home priced in the range of two to three times your gross income. So, if you earn $80,000, you can typically afford a home between $160,000-$240,000. That’s a good starting point, but it doesn’t tell the whole story. The best method is one that takes into account your monthly expenses and debts, because these costs greatly influence how much you can afford.

With that in mind, you’ll want to take time to prepare a budget that tallies your ongoing monthly bills – everything from student loans, car payments, day care, and going out to eat. Do an evaluation of what’s leftover, and you’ll begin to see how much you can spend on a mortgage in California.

Consider Your Down Payment

How much do you have for a down payment? The higher your down payment, the lower your monthly payments will be. Plus, if you can afford to put down 20%, you can avoid getting private mortgage insurance – leaving you with more money for the mortgage payment.

On the other hand, a low down payment means a higher loan amount and a higher monthly mortgage payment. But sometimes you have to do what you have to do. If interest rates or home prices are rising, it’s best to jump into the market before prices increase.

Keep In Mind Your Overall Debt

When it comes to overall debt, most lenders follow the 36% rule. That means in order to arrive at an affordable home price, your total debt should not exceed 36% of your monthly income. CNN Money agrees with this theory, and can help you calculate your monthly payment numbers.

Other areas of debt include monthly bills, car loans, utilities, and credit cards. It’s important to calculate this figure accurately, because it shows how much freedom you have financially. It’s the most honest way to determine your ability to get a mortgage in California.

Think About Your Current Rent Payment

One more factor to consider is the monthly rent amount that you are already paying. Is this an easy payment for you, or are you struggling to make it happen? How much could you afford to see your living expenses increase?

Good news though – think amount your current monthly rent amount. The tax benefits of homeownership generally allow you to afford a mortgage payment about one-third more than your current payment without changing your lifestyle. So, multiply your current rent payment by 1.33 and this would be a rough estimate of an equivalent mortgage payment. For example, if you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after tax benefits.

Most importantly, keep in mind your rent should be seen as an expense, while your mortgage payment is an investment. Do what it takes to avoid throwing your money away and take steps towards getting a mortgage in California.

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