Can I Afford a Mortgage?

By Maurie Backman Markets Fool.com

Owning a home is a huge responsibility, so before you get a home loan, it's important to know what you can afford. If you're just starting out, you may be wondering: How much of a mortgage can I swing on my salary? How do I calculate my monthly payments? And how expensive will property taxes, insurance, and maintenance be? Here, we'll help you figure your spending limits so you don't get in over your head.

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Your mortgage payment

If you're like most homeowners, that mortgage payment will be your single largest monthly expense -- and the more money you put down toward your home, the lower your monthly payments will be, and the less interest you'll end up paying over the life of your loan. To get a sense of what you might need to pay, you can use our helpful mortgage calculator. Simply input the amount you're looking to borrow, the interest rate you're looking at, and the length of your loan (which, for most borrowers, is 30 years, or 360 months). This tool will then spit back your estimated monthly payment amount -- easy.

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Now keep in mind that if you're not planning to put down at least 20% of your home's purchase price, you'll need to pay private mortgage insurance, or PMI, which can easily equal 1% of your loan. So if, for example, you take out a $240,000 loan but are hit with 1% PMI, you'll pay an additional $2,400 a year, or $200 a month, on top of your regular mortgage payment.

Other costs of homeownership

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While calculating your mortgage payment is an important step in determining your monthly housing costs, you'll also need to consider the additional expenses that go hand-in-hand with homeownership. These include property taxes, homeowners' insurance, and maintenance.

Though the average U.S. homeowner pays $2,127 a year in property taxes, in some parts of the country, you might pay five times as much. You can consult this list to see where your state ranks as far as property taxes go, but keep in mind that rates can vary tremendously within states, and even within counties. You should also know that property tax rates aren't set in stone, and they've historically proven to rise over time, even during periods when home values decline. Before you buy, do some research to see how property taxes in your area have fluctuated. This way, you'll get a sense as to what sort of increase to expect.

There's also homeowners' insurance to factor in. While the average homeowner pays $952 per year, this number will very much depend on where you live and the features your property has. A backyard pool, for example, might cause your premium to go up.

Finally, there's home maintenance to factor in. The average homeowner spends 1% to 4% of his or her property's total value on annual upkeep and repairs. If you own a $300,000 property, you might spend anywhere from $3,000 to $12,000 per year on maintenance alone. If your home is on the older side, assume you'll be hitting that 4% mark and budget accordingly.

How much can you afford?

Generally speaking, you should aim to keep your monthly housing costs to 30% or less of your take-home pay. Exceeding this threshold will not only limit your ability to save for other important milestones, like retirement and college, but leave you with less wiggle room for your remaining expenses.

Though most financial experts say it's OK not to include maintenance in that 30% target, you're far better off keeping your total predictable housing costs to 30% or less. So if you bring home $8,000 a month, your total foreseeable housing costs should be $2,400 or less.

Now you can get to that $2,400 in different ways. If your property taxes are only $200 a month, your insurance premiums are $80 a month, and your estimated maintenance costs are $620 a month, then you can comfortably swing a $1,500 mortgage payment. On the other hand, let's say you're looking at an older property with the same taxes and insurance, but 30% more in maintenance costs. To stay at or below that $2,400 mark, you'd need to keep your mortgage payment to roughly $1,300 a month or less.

Also, keep in mind that none of these calculations take unexpected home repairs into consideration. While you can't necessarily anticipate major expenses off the bat, and it's not necessarily reasonable to factor them into your budget, you should make sure to have ample savings on hand before buying a home. Amass an emergency fund with enough cash to cover a solid six months of living expenses, and you'll have reserves to tap if an unplanned home repair bill comes your way.

Though taking on too high a mortgage can wreak havoc on your finances, it's not just your mortgage you need to think about. Rather, you'll need to consider your housing costs on a whole to determine whether you can afford to keep up. And if it turns out you can't swing a home in your desired neighborhood, hold off, save some more, and buy when the time is right. The last thing you want to do is take on too much house and suffer the financial consequences for years to come.

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