One of the most common concerns for many consumers is whether or not they can afford a mortgage. Figuring out whether or not you can afford a mortgage should be more about simply figuring out what your mortgage payment should be. You should also realize that once you buy a home, there are other costs involved.

Better Safe Than Sorry

Many personal finance experts will tell you to keep your mortgage payment to 1/3 of your monthly income. However, this advice doesn’t take into account other costs that come with buying a home. Some of these costs include:

  • Utilities
  • Maintenance
  • Homeowners insurance
  • PMI (if you don’t have a 20% down payment)
  • Property taxes
  • Repairs

In fact, as you try to decide whether or not you can afford a mortgage, you should consider these other costs. You can usually get a yearly estimate of some of these costs, and then divide it by 12. For example, my yearly costs break down like this:

  • Utilities: $2,400
  • Maintenance and Repairs: $500
  • Homeowners insurance: $650
  • Property taxes: $1,200
  • PMI: $300

Over the course of a year, that adds up to $5,050. That’s about $420.83 per month. Add it to my $1,100 mortgage payment, and the total monthly cost for my home is $1,520.83 each month. Fortunately, that represents less than 20% of my monthly income. If you want to know if you can afford a mortgage, you need to add all the “extras” to it as well. Going with the 1/3 rule, you would have to make at least $4,562.49 a month ($54,749.88 a year) to afford the costs.

You might be better off, though, to ignore this advice from the experts, and instead focus on keeping your mortgage payment and other expenses to 25% of your income. This means that you might not be able to get large a mortgage. However, you would be a little more secure in your home — even if it would be a smaller home.

Another good idea is to test out your ability to make mortgage payments. You can do this by figuring the difference between what you pay now in rent, and what you would pay if you had a home. In my example, I was paying $700 in rent + $150 a month in utilities and $10 a month renter’s insurance. The difference in costs was $1,520.83 – $860 = $660.83. In order to test whether or not I could afford the difference, putting that $660.83 into a separate savings account each month would be helpful. If I did it for four to six months without straining the budget, then I could afford buying a home. (Plus, the extra money is great to add to a down payment, pay mortgage points, or buy furniture.)

How do you decide whether you can afford a mortgage?