Can you really afford to buy a house right now?

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How Much House Can You Afford?


The scenario: Your landlord keeps hiking up your rent, and you're tired of reworking your budget to accommodate the other areas of your life — or worse, searching for a new rental. You want to invest in a home for sale in Charleston, SC, or Seattle, WA, but you're not sure if now is the right time.

There are two likely reasons for your hesitation: time and money. Deciding if you should rent or buy can be determined in part by your commitment to an area — you could have legitimate concerns about job relocation or you may wonder if the space you can afford now will be flexible enough that you won't grow out of it just a few years down the road. And on an economic level, perhaps you're not sure you can afford all the costs that a down payment, mortgage, and home maintenance entail.

The first step? Do some homework. Consider these questions to help you decide if the answer to "Can I afford a house?" is yes.

Should you buy before home prices climb higher?

In most parts of the U.S., home prices have been climbing steadily for the past few years. Does this mean you should rush to lock in the current prices before they rise even higher? The best answer: not necessarily. Do what's right for you. If you're planning to stay in one spot for a decade or more, short-term fluctuations in the house's underlying value shouldn't make a difference. After all, the primary purpose of a home is to provide a place to live, coupled with an opportunity to grow equity over time. Don't overanalyze the market when deciding to buy a house. If the time is right for you, there's no reason to wait.

Do you have a 20% down payment?

One of the major factors in determining if the time is right to buy a house: whether you have the finances to purchase one. Many lenders require a 20% down payment before they'll grant you a mortgage. If you can't come up with such a hefty down payment, it's possible to secure a loan, but you'll probably have to pay private mortgage insurance, or PMI, to make up the difference.

PMI rates vary from lender to lender but generally cost 0.05% to 1% of the total loan amount. At 0.05%, you'll pay $41.50 per month for every $100,000 worth of loan that you carry. If you're holding an FHA-insured loan, you pay two different mortgage insurance premiums. The upfront premium is 1.75% of your loan size, and it will be added to your borrowed amount (thus increasing your monthly costs). You'll also pay a second premium, which is assessed annually and billed monthly. This second fee, often known as monthly mortgage insurance, will cost 1.3% annually if you carry a 30-year mortgage and put down at least 5%.

The bottom line? Not having a 20% down payment on hand can be a very expensive proposition. If you borrow $200,000, for example, and you're charged 1% PMI, you'll hand over $166 per month — not an insignificant sum.

RELATED: The salary needed to buy a home in 19 major cities

20 PHOTOS
Salary to buy a home in 19 major US cities
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Can you really afford to buy a house right now?

19. San Antonio

Population: 1,409,000

Median Home Price: $192,100

Monthly Mortgage Payment: $1,096

Salary Needed to Buy: $46,000

Photo via Getty

18. Orlando

Population: 255,483

Median Home Price: $205,000

Monthly Mortgage Payment: $1,115

Salary Needed to Buy: $48,000

Photo via AOL

17. Minneapolis

Population: 407,207

Median Home Price: $223,700

Monthly Mortgage Payment: $1,172

Salary Needed to Buy: $50,500

Photo via AOL

16. Philadelphia

Population: 1,517,628

Median Home Price: $213,700

Monthly Mortgage Payment: $1,204

Salary Needed to Buy: $51,500

Photo via Getty

15. Dallas

Population: 2,518,638

Median Home Price: $206,200

Monthly Mortgage Payment: $1,208

Salary Needed to Buy: $52,000

Photo via Getty

14. Houston

Population: 2,076,189

Median Home Price: $209,200

Monthly Mortgage Payment: $1,217

Salary Needed to Buy: $52,000

Photo via Getty

13. Baltimore

Population: 640,064

Median Home Price: $233,500

Monthly Mortgage Payment: $1,233

Salary Needed to Buy: $53,000

Photo via Getty

12. Chicago

Population: 2,824,584

Median Home Price: $209,800

Monthly Mortgage Payment: $1,352

Salary Needed to Buy: $58,000

Photo via Getty

11. Sacramento

Population: 479,686

Median Home Price: $294,100

Monthly Mortgage Payment: $1,450

Salary Needed to Buy: $62,000

Photo via Getty

10. Miami

Population: 417,650

Median Home Price: $286,000

Monthly Mortgage Payment: $1,471

Salary Needed to Buy: $63,000

Photo via AOL

9. Portland

Population: 609,456

Median Home Price: $318,300

Monthly Mortgage Payment $1,538

Salary Needed to Buy: $66,000

Photo via AOL

8. Denver

Population: 649,495

Median Home Price: $353,500

Monthly Mortgage Payment: $1,596

Salary Needed to Buy: $68,500

Photo via AOL

7. Seattle

Population: 652,405

Median Home Price: $385,300

Monthly Mortgage Payment: $1,829

Salary Needed to Buy: $78,500

Photo via Getty

6. Washington, DC

Population: 582,049

Median Home Price: $371,600

Monthly Mortgage Payment: $1,834

Salary Needed to Buy: $78,500

Photo via Getty

5. Boston

Population: 645,966

Median Home Price: $393,600

Monthly Mortgage Payment: $1,940

Salary Needed to Buy: $83,000

Photo via Getty

4. New York City

Population: 8,213,839

Median Home Price: $384,600

Monthly Mortgage Payment: $2,024

Salary Needed to Buy: $87,000

Photo via Getty

3. Los Angeles

Population: 3,794,640

Median Home Price: $481,900

Monthly Mortgage Payment: $2,217

Salary Needed to Buy: $95,000

Photo via Getty

2. San Diego

Population: 1,284,347

Median Home Price: $546,800

Monthly Mortgage Payment: $2,407

Salary Needed to Buy: $103,000

Photo via Getty

1. San Francisco

Population: 777,660

Median Home Price: $781,600

Monthly Mortgage Payment: $3,453

Salary Needed to Buy: $148,000

Photo via Getty

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Can you budget for recurring monthly expenses?

Your mortgage payment is the heftiest of all monthly payments. It comprises four items: principal, interest, taxes, and insurance. (Together, these are known as PITI.) If you have a fixed-rate mortgage, your principal and interest will remain a flat monthly fee, regardless of what's happening in the overall economy. However, your taxes and insurance may change, so even with a fixed-rate mortgage, your payment could fluctuate. Taxes are set by your county government and are based on its assessment of your property, so this expense is subject to increase at any point — either if your county reassesses your home at a higher value or if your local government decides to boost its tax rates.

Ask yourself: Do you have the space in your budget to accommodate that type of tax increase? If your budget is so tight that this will cause you to miss payments, you're probably not in a strong enough position (right now) to buy a home. Likewise, you might decide to buy a home in a community that's governed by a homeowners' association, or HOA. This HOA can assess mandatory "dues" and put a lien on your house if you don't pay the bill. And the HOA can decide to raise its dues at any point. Do you have enough wiggle room in your budget to accommodate a fee hike?

Do you have savings for maintenance and repairs?

Your mortgage isn't the only housing expense you'll need to meet in your budget. When you move from a rental to a home, you have new responsibilities (and the related costs), such as cleaning the gutters, replacing or repairing the roof, fixing and maintaining the HVAC, refinishing the floors, hiring a plumber, installing a new dishwasher, and repairing a broken garbage disposal.

As a very broad rule of thumb, you should budget 1% of the home's purchase price annually for repairs and maintenance. For example: If your home is worth $300,000, set aside $3,000 per year, or $250 per month. You probably won't spend this amount each month. Some months, you'll spend zero. But another month, you may need to replace every window in your home — and could rack up a $7,500 bill.

How long will you stay in your home?

Buying and selling a home incurs thousands in closing costs — including inspections, title insurance, transfer tax, attorney fees, and real estate commissions. If you're going to hold on to your home for several years, those costs will spread themselves out over time. But if you might be selling your home after two or three years, those costs (in addition to property taxes, homeowners insurance, mortgage interest, and maintenance) might add up to more than what you would have paid in rent.

How did you decide whether to rent or buy? Share your experiences in the comments!

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