How much can you afford?

Sure we all want to own a home, but determining what is in reach can be difficult.  To help simplify things, we look at affordability in terms of two fundamental components; Your down payment and your monthly mortgage payment. Knowing how they affect one another will help you estimate the upfront purchase cost, as well as the monthly payments. 

The 2 fundamentals of affordability

An easy way to think of these two components is visualizing on an old school balance scale. The bigger your downpayment is on one side, the less your monthly mortgage payment will be. Conversely, the less you put down, the higher your monthly mortgage payment will be. 

1. Down payment amount

• What determines how far your down payment goes is your loan type.
  
  • If you are a first-time buyer, there are great low downpayment options.

 EXAMPLE

• What $30K downpayment gets you as a first-time homebuyer.
  
  • 3% down: $1,000,000 single-family home**
  • 5% down: $600,000 single-family home
  • 10% down: $300,000 single-family home
  • 20% down: $150,000 single-family home

2. Monthly mortgage payment

• This is largely dependent on 2 things:
  
  • Down payment amount (covered above)
  • Interest rate (Mainly based on your credit and debt-to-income ratio)

 EXAMPLE

• Let’s see what these down payment amounts do to your monthly mortgage on a $1,000,000 single-family home. Interest rate 7%:
  
  • 3% down:  $7,177 / month
  • 5% down:  $7,044 / month
  • 10% down:  $6,712 / month
  • 20% down: $6,046 / month

Balancing downpayment and monthly mortgage

As you can see from the examples above, while $30K can potentially get you a $1,000,000 home, the monthly mortgage payment is really high. You’ll have to balance both of these to determine what is affordable according to your budget, city, and home buying strategy.

How house hacking helps tip the scale in your favor

House hacking strategies are becoming popular because they help down payments go further and reduce monthly mortgage payments without needing to pick one or the other. In the scenario above, a $30K down payment forces you to choose between a few variables, either a more affordable city or continuing to save for a MUCH larger down payment, which can take years or decades. 

1. Primary multi-family home 

One house strategy that makes more sense with a $30K down payment is buying a primary multi-family home. If you buy a two-unit home for around $800,000 you can rent out the other unit and reduce your monthly mortgage payment by 50%. 

2. Primary multi-family + cobuying

You can also combine co-buying and a primary multi-family home. If you put $30K down and a friend / family member also puts $30K down, you can buy a four-unit home for $1,200,000, each living in a unit and renting out the other two. In this scenario your personal mortgage responsibility is 75% less than buying on your own. 

Want to see what you can afford?

Schedule a call with one of our home buying coordinators. It’s simple and painless… promise.

Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market.  While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.

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