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Affordability Calculator

Once You've Decided You Want To Buy...How much house can you afford

The Next Thing Is To Calculate How Much House You Can Afford

In the Bay Area, your first home is likely to be a "starter home". Unless you're independently wealthy, it's unlikely that your first home will be your Dream Home. However, it is a great first step on the path to the home that you ultimately want to own. The general trend line for Bay Area real estate has been steeply rising for decades—in spite of periodic corrections. Please be aware that past results don't guarantee future results. Overall however, getting into a starter home to climb the "property value ladder" is a strategy to consider. 

Do Your Own Research and Carefully Consider Your Circumstances

There are many variables that you will want to think about. Here are a few:

  • How secure is your job and income, and the jobs and income of any potential co-owners?
  • Do you have adequate savings to support the home payments should there be a loss of income?
  • How long do you expect to be in the home? If you're in a situation where you won't be forced to sell in a down market, that's obviously better than taking a chance on a potential forced sale.
  • Will a starter home suffice for your family unit for a long enough period that you'll accrue equity. It's also important that you've got enough time that values could potentially increase enough to fund your next move.

How much house can you affordLet's Start At The Beginning

How Much Home Can You Afford?

Starting down the path to home ownership, you want to know how much you can afford. It's going to be different for each buyer, and for each set of circumstances. Let's take a look at this calculator and get you started. Here are a few ideas for how to fill out the information in the calculator. Realize that it is an estimate and that you can play with the different fields to see various possibilities.

  • Put your current monthly rent in the Your monthly rent payment input field.
  • To find the mortgage rate for the Mortgage interest rate, click this link to go to the Mortgage Rates page of this site. The rates on this page are updated daily. See what the current mortgage rates are and use that figure for your estimation. Start off with the Fixed Rate figure. If you want to experiment with the other two rates, try that out also. Realize that these are just estimations.
  • For the Mortgage term (years), put 30 years. As a new buyer, that's likely the term of the mortgage you will get. You can always experiment with the numbers later and try different variations.
  • Plug those three figures in and click the Estimate Mortgage Size button. You will get the size of the mortgage you could afford. Below that you will see two significant results:
    • The size of a 10% down payment you would need and the price of the home you could afford with a 10% down payment
    • The size of a 20% down payment you would need and the price of the home you could afford with a 20% down payment

 

You can buy your own homeNow, Let's Look At Loan Qualification

To See How Much Of A Loan You Qualify For

Here's a calculator that will show you the size of loan you can qualify for. The size of the loan can be adjusted by the amount you can afford for the down payment. The objective here is to get you thinking about what you can afford and ways you can afford it. Here are some hints for how you could fill out the answers to this calculator:

  • For Purchase price, you might put the results from the calculator above of the Associated home value with either 10% or 20% down payment.
  • For Down payment, you can put the percentage of either 10% or 20%. You can also play with other percentages of down payment as well simply to educate yourself on how it might affect your qualifying for a loan. Notice that there is a drop down box where you can change this from % to $. If you know what dollar amount you have available, use the $. Experiment with this and see what various possibilities are for you.
  • For Loan Amount, you can put the loan amount you calculated above with the previous calculator.
  • For Annual interest rate, click this link to go to the Mortgage Rates page of this site to find today's mortgage rate. These rates are updated daily. See what the current mortgage rates are and use that figure for your estimation. Start off with the Fixed Rate figure. If you want to experiment with the other two rates, try that out also.
  • For Length of the mortgage in years, put 30 years. As a new buyer, that's likely the term of the mortgage you will get. You can always experiment with the numbers later.
  • For Annual property taxes, you can use the Santa Clara County Property Tax Rate of 0.794%. Note that you need to use the drop down box and use % rather than $. Please know that there are often other special tax assessments added to that 0.794%. You are unlikely to know the actual tax amount until you have selected a home and know what specific taxing districts the home is subject to. Once you've calculated the dollar amount of the tax, put it in this input field. To be safe, you could use 1% in this field.
  • Annual insurance 
  • To figure out what to put for Annual PMI, realize that Private Mortgage Insurance (PMI) is required on loans when the buyer has less than a 20% down payment. This insurance is to protect the lender. If you have a 20% down payment, you can put zero in the Annual PMI input field. If you do not have the 20% down, you'll be paying Private Mortgage Insurance of  0.2% to 0.5% of your principal balance each month. If you don't know what this figure is, you'll just have to estimate it until you get more details. Start with the conservite figure of 0.5%. Be sure the drop down box is set to %.
  • Monthly association fees are monthly dues typically associated with condos, but also associated with some other types of housing. It's impossible to know what this amount will be. If you're not buying a condo, it's probably safe to put zero for the answer here. If you know what condo association you want to purchase in, you should be able to find the association dues for a similar unit on this site in a search.

Home ownership in Silicon Valley is within your reachAt this point, you get an estimation of your monthly payment...and most importantly, you get an estimate of the Tax deductible portion of payment. Multiply that number by the number of months you expect to be in the home in the year and you get an estimate of the amount of your mortgage interest deduction for income tax purposes. Now, let's move on to the actual qualification portion of this calculator. Here's some information on how to enter your data.

  • For Gross income, add the total of all your income from all sources. At this point, this can be a close estimate. Obviously, as you get closer to actually becoming a buyer, you want to get really clear on the actual total and experiment with it. Note that you can use the drop down box to enter Annual or Monthly gross income in the input field.
  • You'll see that putting that information produces four really interesting results below:
    • Qualify for loan? will say Yes or No, telling you whether or not your current income qualifies you for a loan.
    • Maximum qualifying loan amount tells you the estimated amount of loan that your income qualifies you for.
    • Current Income to payment ratio (max = 28%) is a percentage that lenders use to ensure that you have adequate income to pay your payments on the loan you are qualified for. As you can see, the maximum percentage is 28% and you need to not be above that number.
    • Current debt to income ratio (max = 36%) is a percentage that lenders use to ensure that your debt load is not too high so that you have adequate funds to pay your mortgage over time. Your debt load, including the projected mortgage payments, must not exceed 36%.
  • Now, there's one more step. You must add up all your current debt monthly payments and Relax in your own homeput that figure in Monthly debt payments and click the Calculate button. That will show you the best estimate of your figures for Current Income to payment ratio (max = 28%), and Current debt to income ratio (max = 36%).
  • For one further educational step, you can click the Create Amortization Schedule button. This schedule will show you the total of payments you will pay over the term of the loan. The most important thing to observe though is the amount of interest for each year of the term of the loan. That number is the estimated amount of your income tax mortgage interest deduction.

 

Celebrate what you learned in these calculationsHow Do You Feel After Doing These Calculations

I'm sure that you probably learned a few things working with these calculators. It can be really eye-opening. If you'd like to talk about what you learned and discuss your options, feel free to give me a call.

 

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