How Much House Can I Afford to Buy?

I've got a very good feeling that young people have been watching the news and learning from the messy financial situation facing the country and world these days. While they are enticed by the excellent market conditions (very low mortgage rates, lower house prices and a tax credit!!) there is a lot of concern and conservatism regarding personal finances. Hooray! I am meeting more and more people in their 20's that have little to no debt, aside from student loans. I'm optimistic that this next generation gets it.

As I meet with first time home buyers, they struggle with the decision over how much house to buy. They don't want to get in trouble. That is excellent but I also counsel buyers not to buy too little. It is very expensive to buy and sell houses and with houses appreciating at a slower rate these days, you can expect it to take 4 to 7 years to recoup your closing costs.
So how do you know how much house to buy? Conventional wisdom is that a 30 year mortgage payment (PITI) should fall in the range of 28 to 33 percent of personal income. Here is a link to a handy calculator that can help you figure this range. http://cgi.money.cnn.com/tools/houseafford/houseafford.html .

Keep in mind, this is a very simplistic approach to deciding how much to spend. A more comprehensive approach is to chart out all your monthly expenses, set goals for savings (long term and short term) and actually formulate a budget. I know that "budget" is often considered a dirty word but a budget will help you analysis your spending habits and prioritize where you want your money to go, i.e., would you rather travel or have a more expensive home? Visa, the credit card company, has an excellent web site on practical money skills that includes a budget tool. If you want to check it out, go to http://practicalmoneyskills.com/english/wizards/downloadtool.php


Houses in the lower price ranges continue to sell very, very quickly in Rochester right now and luxury homes are beginning to get more attention. I'm looking forward to seeing the numbers for our first quarter.