The hot housing market has given would-be buyers a reason to reevaluate their budgets. Home prices jumped 19.5% in September year over year, and it's not unusual for those in the market to encounter bidding wars and homes that sell within days of being listed.
Many buyers have turned to the internet to make sure they're not spending too much. Google searches for "affordable homes for sale" jumped 108% in 2020 compared to pre-pandemic and were up another 30% in 2021, according to Point2Homes. The website searched frequently occurring real estate terms in 2020 and 2021, and compared their average monthly searches to 2019.
"How much house can I afford?" searches spiked 50% since 2019, the report found, while search volume for "How much mortgage can I afford?" was up 22% in 2020 and rose another 22% in 2021.
Whether you're a first-time homebuyer or are looking for your next place, those are key questions to be asking, since it's crucial to spend within your means, experts say. Here's how to determine how much home you can afford.
"Determine how much house you can afford in order to set boundaries around your home shopping," Bankrate chief analyst Greg McBride recently told Grow. "And focus on building your savings and paying down debt so you can put your best foot forward in homeownership."
Financial advisors suggest you keep your housing expenses within roughly a quarter of your income. One way to do that is by following the 28/36 rule that lenders use, which dictates that a maximum of 28% of your monthly gross income should go toward housing expenses, while no more than 36% of those funds be dedicated to housing and other debts.
There's some flexibility in the numbers based on your circumstances. Where you live matters, for example, since home prices are much higher in some parts of the country. Your other life expenses like student loan debt and retirement savings come into play, too. And having a great credit score can offer opportunities to get a cheaper mortgage or a pricier home.
Check out Grow's housing budget calculator for a sense of the monthly payments your income will allow.
Buying a home can be a smart financial move, depending on your circumstances. But spending more than you can afford is likely to put you in a bind, says Anthony Sherman, CEO of digital mortgage platform Simplist.
If the market seems too hot, it's OK to take your time, he adds. It's important to find a home at the right price for you.
Use the web, ask a broker for help, and tap the other resources at your disposal. Shop around to compare mortgage rates and terms, Sherman says. First-time buyers may have access to homebuyer assistance programs, too, which could help reduce some of the burden and cover part of your down payment.
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