Tommy Pursel Group - Las Vegas Real Estate Professionals
Our calculator will estimate the size of a home mortgage loan you can afford to borrow based on the size of your current monthly rent payment.
Note: This calculator assumes that your house's property tax, insurance and maintenance expenses will be offset by the appreciation of the value of your home. Depending on market conditions & timing that may or may not be the case — as real estate prices change due to a wide array of local factors and broader macro-economic impacts like changes in mortgage rates.
See our full rent vs buy calculator for more detailed calculations and look at Trulia's map for local market conditions. Frequently trading in and out of real estate can be stressful & expensive. It is typically a large transaction, and you may not beat transaction costs, particularly if you do not live in the house very long before selling it & thus do not build up much home equity to offset real estate commissions & other transaction-based costs.
The Critical Importance of Understanding Home Affordability
Deciding to purchase a home requires an enormous amount of self-assessment and detailed planning before making this long-term commitment. It is an individual choice that requires careful consideration and an analysis of the realities associated with home ownership. The great American dream of owning a home may not be for everyone for a variety of reasons. It does require some lifestyle changes that many people are not willing to make. Those who want to fulfill the American dream of owning a home must make that their first priority and begin to prepare for it.
Early Financial Preparation Makes Buying a Home Easier
Mortgage calculators help prospective home buys determine exactly how much they can afford. They are tools that help determine how much home is affordable based on income, interest rates and length of time for the loan. Lenders are interested in calculating a person's debt-to-income ratio during the loan approval process. Generally, if the debt-to-income ratio is above thirty-six percent, chances of getting a loan are slim. This is the time to begin the process of attempting to reduce the amount of debt before applying for the loan.
Credit Scores Play a Major Role in the Loan Approval Process
Many people never think about their credit score until they apply for a loan. Sometimes they are surprised to find that their scores are too low, which disqualifies them to some loans. The three major credit-reporting agencies keep track of all credit transactions and assign a score based on the way credit is handled. Credit scores that range between 700 and 770 are considered good, but it all depends on the lender. Each one has their own set of criteria for approving loans. Those with low credit scores cannot expect to get the best interest rates on a home loan. These are reserved for those with the highest scores. Those with low credit scores can fix their credit if they are aware of it early enough in the home buying process. Since it may take months to undo credit problems, checking early allows time to begin the process of rebuilding credit before applying for a loan. Annual credit reports are free and it pays to check early.
Financial Requirements to Consider
Purchasing a home is probably the largest purchase most people will make during their lifetime, which makes being prepared even more critical. It is imperative to evaluate all personal finances and determine how much money will be available for a down payment. A good rule of thumb to follow when trying to determine how much of a down payment will be required is to decide on the amount of money that will be spent on a house. Most loans require a twenty percent down payment. Most lenders require this much down in order to provide better interest rates and loan terms. Making a substantial down payment helps buyers avoid paying private mortgage insurance and protects as decreased property values. In addition to the cash needed for a down payment, there are some hidden costs to consider. Extra funds will be needed to cover appraisal costs and closing costs. This should be taken into account when evaluating the affordability of a home purchase.
The Inevitable Effects of Local Market Conditions
Market trends have an impact on what buyers and sellers can expect, but national averages do not reflect local market norms. The local economic conditions determine local market trends, which are much more reliable gauges of market status. It is best to pay attention to some local market indicators to help determine affordability in the housing market. These markers provide a clearer picture of the local housing market than national ones. Research the number of applications for new building permits, real estate statistics showing the number of homes currently listed, how long they have been on the market and median listing and sales prices at the local level.
The Importance of New Construction Permits
This is a good indicator of market demand. Builders and developers will not be building if there is no current demand. Cities and towns accept applications for new construction permits. These are easily accessible through city and county government offices. Supply and demand plays a key role in new development. Building trends affect housing prices.
Important Market Trend Indicators
Several online real estate websites list houses for sale in a particular region. Among these are Trulia and Zillow. Both of these sites allow a prospective buyer to search for properties for sale in a selected area. This is one way to determine the number of homes currently on the market, how long they have been for sale and the listing prices. Another way is to search real estate ads in the local newspaper. Many local real estate brokers and agents maintain a website with their listings. This is an excellent source of information regarding listing prices, time properties have been on the market, detailed information such as cost per square foot of homes and median price ranges in selected areas. Some sites list the average sales per month. The softness of a market is determined by inventory that is moving slowly or has remained level for twelve months or longer. An indicator of an improving market is to compare how long it took a house to sell six months to a year ago compared to now.
Employment Trends Play a Key Role in the Housing Market
The local economy of any area is affected by current economic conditions. In areas where new businesses are welcomed to the city, those businesses bring a boost to the local economy. Big employers sometimes transfer employees to the new locations. These employees must find housing thus increasing the demand for more available existing homes and new construction. If unemployment rates are high in the area, housing demand will decrease. New businesses will bring job offers and help increase the population. A growing populace signals a future uptick in the local real estate market.
Determining Affordability Before Applying for a Loan
In order to qualify for a mortgage on a median-priced home, a prospective homeowner should understand that the monthly payment should not exceed twenty-five percent of the gross monthly income. Using this formula, the necessary monthly gross income should at least be equal to the monthly payment multiplied by four. A review of a recent tax return helps determine the annual gross and net income based on the W-2 tax form. Keep all this financial information in a file for quick reference. A factor that is as important in determining affordability of a property is the current effective mortgage rate that is reported monthly by the Federal Housing Finance Board. This rate allows homeowners to calculate the additional costs associated with a mortgage besides the basic monthly mortgage payment. Interest rates and fees associated with owning a mortgage must be added into the equation when trying to determine qualifications needed when applying for a mortgage loan and ultimately servicing it.
Reasons for Buying Instead of Renting
Many benefits are derived from owning a home including a sense of freedom and privacy. Renters must comply with rules set forth by the landlord including noise restrictions and pet ownership. Homeowners have the freedom to make any permanent changes to the property without having to consult with anyone. Homes give owners the added benefit of being in charge of an appreciating investment while enjoying living in it. Market fluctuations have do not affect fixed mortgage payments, unlike rent payments, which are volatile and can change whenever a lease term ends.
Homeowners can deduct mortgage interest from their gross income to help lower their taxable income when filing income tax forms. Being able to itemize deductions helps with tax obligations depending on filing status. All interest paid on a mortgage and accompanying costs associated with owning a home are deductible. Even loan discount points may be included in the deduction.
Purchasing a home gives the owner the distinct advantage of building equity over a period of time. A home is a valuable asset that grows as the mortgage is paid down. Equity is the difference between the total mortgage amount and the current market value of the home. When the housing market is favorable, the return on the initial investment can be substantial. Many people choose to borrow against built-up equity. This is known as a home equity loan that many people use to pay down higher-interest loans, finance a college education or make home improvements.
Possible Reasons for Not Buying a Home
Some people are not willing to take what they perceive as the risks involved in buying a home. Even though owning a home provides stability, many people are not willing to give up the perceived freedom from being able to walk away from a rental. Renting provides more flexibility to just pick up and move without the hassle of having to sell a property first. Some may lack the confidence that is needed to commit to a long-term debt knowing that the mortgage payment is not the only expense involved in home ownership. Many are just not ready for this commitment. Anyone who is in an unstable relationship may fear the possibility of being left to handle the debt alone. For them, renting is a much better choice.
Financial Reasons for Renting Instead of Buying
There are circumstances where renting is better for some people. Career positions that require extensive traveling can limit an individual's living choices. Being away from home for extended periods of time make it almost impossible to maintain a home and yard. Many times those people, who are in the process of building a career, only need a place to stay when they are not on a trip. Renting works out better for them especially when it is much cheaper to rent than to own. In some places, rent can be as much as fifty percent cheaper than a comparable sized house. The extra monthly expenses associated with home ownership are eliminated with renting. Besides the monthly rental payment and possibly utilities, there are no other costs associated with renting. Other than adhering to required lease terms, it is simple to move whenever necessary.
Costs Directly Associated with Home Ownership
When considering the possibility of purchasing a home, it is best to deal with reality. Sometimes the purchase of a home is an emotional decision rather than a sound financial one. It is much better to know up-front the costs of owning a home and then decide whether buying it is the best choice. Mortgage payments are only the beginning of the expenses associated with owning and maintaining a home. The initial cost of purchasing includes making a required down payment of between ten and twenty percent of the purchase price. Inspection fees and closing costs must be figured into the equation. Homeowner's insurance, property taxes and utilities can be a major monthly expense that must be factored into the overall cost. Landscaping and lawn maintenance are additional expenses. Many neighborhood have a Homeowners Association that requires an annual fee which is used to maintain streets and any common areas.
Making an Educated Decision to Purchase a Home
People living in the United States are fortunate to be able to make lifestyle choices. Some feel that home ownership is the fulfillment of the American dream, while others prefer a much more flexible lifestyle. For those who prefer owning instead of renting, purchasing a home is probably the largest single investment they will ever make. For this reason, it is important to understand everything involved in home ownership before making the final commitment to buy. Those who research the market, examine their own finances, and try to separate myths from truths about home ownership are better prepared to make this serious decision. If they conclude that their goal of achieving the great American dream is an attainable one and understand everything associated with this long-term commitment, they will reap the benefits of home ownership. Understanding affordability of a home purchase helps individuals make smart financial choices. Seeking professional assistance is advisable for those with questions or concerns. Advance preparation ensures a smoother transaction.