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Mortgage Loan

Mortgage Guide Step 7: How Much Mortgage Loan Can You Afford

    Buying a home is like buying a pet. It doesn't just cost the initial fee, whether it's a mansion or a schnauzer. There will always be additional costs beyond your mortgage loan. When it's cold you have to heat the house, when it's hot you need to cool it, when it's dark you need to light it and when its broken you need to fix it. While next month's utility bill, next week's plumbing repair invoice and next year's exterior paint job may seem like just a fee odd and end bills that can be paid out of pocket change, think again. All of the little extra costs -- utilities, repairs, upkeeps, taxes, insurance -- end up costing much more than most think. Before you sign a mortgage loan make sure you consider that your monthly mortgage payment won't be your only housing expense.

How Much You Should Spend on Housing

    Housing is very expensive and depending on your lifestyle, you may budget more or less to cover that cost. The FHA decided that most people can afford to put 29 percent of their income towards housing (HUD). However, just most people can, doesn't mean you should. Only sign a mortgage loan you feel like you can comfortably pay and still afford to maintain your house. Don't feel pressured to buy more house than you can afford.

Beyond the Mortgage Loan

    After factoring in the monthly payments for your mortgage loan, it is time to figure out the extra costs. The important extra costs you should consider are utilities, repairs, upkeep, taxes and insurance.

Utilities. Every community has a different set of utilities. The common utilities are gas, electricity, oil and water. However, there are always extras that could fall into this category, such as recycling or sewage fees. To determine the cost of utilities where you plan to move call the local government or ask the sellers of the home. 

Repairs and Upkeep. One of the downsides of having a home is having to handle the repairs and upkeep. While they may seem like a hassle, they are vital to maintaining the value of your home. If you neglect your home, you will see the results in your selling price. To keep your home a valuable asset, you better get your wallet prepared.
    Whether its landscaping the front yard or discovering termites, it will probably cost more than you would like. For example, my neighbors paint their house every four to five years. Their most recent paint job looks great; however, the bill wasn't as pretty. To paint their 5 bedroom, 2 and a half bathroom home they spent $14,000. Which means it costs them $2,800 a year just to keep their house looking fresh. Just imagine how much it will cost to keep your entire house -- inside and out -- well maintained.
    While you can't plan for repairs, you can have a rough idea of how much it will cost to upkeep your future house. To determine how much you will need, you should first place look at condo association fees. They are a great rough indicator of how much you will need to spend. However, you should keep in mind that those fees are only used to cover the cost of exterior maintenance and you will need to set aside more in order to upkeep the interior as well.
For a more precise figure you will need to spend some extra time. Think about the condition of the house you want to buy. How old is the furnace, air conditioner and water heater? How old are the appliances? How old is the roof or plumbing? What about the windows and doors? Will you need to fix or replace any of those things during your time living in that house? If so, for each item you should give a rough estimate of how much they will cost to replace and how many times you will need to replace them. Then start thinking about how you plan to beautify your home. Will you plant landscaping or paint every four years like my neighbors? Will you remodel any rooms or redecorate every few years? If so, add those costs to your list. 
    Once you have finished your list, add all of the items together. Then divide that number by how many months you plan on living in the home. The figure you get plus some extra is how much money you should put aside each month along with your mortgage loan payments and other costs for housing.

Taxes. Depending on where you live, you may need to pay many taxes or just a few. To determine what taxes you will need to pay contact the local government.

Home Owners Insurance. When you take out a mortgage loan, you will probably be required to have home owners insurance (Opdyke 50). The amount you have to pay each month will depend on what type of policy you purchase.

    Once you have figured out how much you need to budget each month for utilities, repairs, upkeep, taxes and insurance, you should add that number to your monthly mortgage loan payments. Is it more than you thought? If so, will you still be able to afford the house you were looking at or the mortgage loan payments you thought would be easy to pay off? The cost of utilities, repairs, upkeep, taxes, insurance and mortgage loan payments is much closer to your actual housing cost. Be careful not to underestimate when determining how much you will need to put aside.

The Rest of Our Mortgage Guide:


Opdyke, Jeff D. The Wall Street Journal. Complete Personal Finance Guidebook. New York: Three Rivers Press, 2006.

"The HUD Home Buying Guide." U.S. Department of Housing and Urban Development. August 2004. U.S. Department of Housing and Urban Development 24 August 2006.