How Much Home to Consider

Buying and owning a home is expensive. You will need funds for a down payment (perhaps 20% of the purchase price) and any mortgage closing costs before you buy. After you buy, you will have monthly mortgage payments, property taxes and insurance. Then, there are the other expenses like utilities and maintenance. Finally, if you are like most homeowners, you will want to furnish it. All of these items cost money.

Deciding how much to spend for a home can be complex. You probably want as nice of a home as possible, but you want to be able to afford it. What you can afford depends on the size of your mortgage, mortgage rates, costs of home ownership, your other expenses and your income. One rule of thumb to consider is that the total of your mortgage payment, property taxes and insurance should be no more than 28% of your household income. Here is a worksheet and a table of mortgage payments to help with the calculation.

Interest Rate

Mortgage Amounts

	$100,000	$150,000	$200,000	$250,000
5.0%	$536.82	$805.23	$1,073.64	$1,342.05
5.5%	$567.79	$851.68	$1,135.58	$1,419.47
6.0%	$599.55	$899.33	$1,199.10	$1,498.88
6.5%	$632.07	$948.10	$1,264.14	$1,580.17

Many financial websites include mortgage calculators to provide more precise payment levels and you can also calculate mortgage payments for other lengths of mortgages.

	Sample	Sample
Mortgage amount	$100,000	$150,000	$	$
Monthly payment x 12	($599.55x12)	($899.33x12)
Property taxes	$2,625	$2,625
Insurance	$1,200	$1,200
Total	$11,020	$14,617
Household income	$50,000	$50,000
Times 28%	x.28	x.28	x.28	x.28
What you can afford	$14,000	$14,000
Difference	+$2980	-$617	+ or -	+ or -

The sample is based on buying a $175,000 house with a 6% 30 year mortgage. As the chart shows, this person can probably comfortably afford buying the home with a much larger down payment. As a practical matter, the person could probably be comfortable with a mortgage in the $125,000 to $130,000 range.

Tax benefits from home ownership

Many taxpayers find that the interest on their mortgage and the annual property taxes they pay are large enough to enable them to itemize their deductions instead of using what is commonly referred to as the standard deduction. The standard deduction for single filers on their 2008 tax returns is $5,450 and $10,900 for joint filers. For many homeowners, their interest and property taxes exceed those amounts. Be sure to keep track of when you pay your property taxes. Some taxing districts have due dates close to the end of the year and you must have paid the tax before December 31st to get the deduction.

The IRS also allows you to exclude any gain on selling your house up to $500,000 if you file a joint income tax return and meet certain requirements. You may want to investigate these tax advantages further or talk to a tax accountant to completely understand the tax advantages.

Potential gains from selling your home

Home values have risen substantially in most parts of the country over the past decade. With a strong economy and low mortgage rates, the demand for housing has increased the prices people have been willing to pay. These rising values have enabled many to reap large profits when selling their homes. However, home values do not always appreciate and certain areas can be dependent on the local economy for housing demand.

Summary

If you are like millions of others, owning your own home is a primary financial and lifestyle goal. The pride of home ownership and the financial rewards are attractive. Just make sure you understand that there can be some downsides before you make the decision.