| How do you figure out how much house I can afford? |
We base our estimates of affordability largely on two main factors: your ability to service your monthly home/debt payments and your remaining savings after paying all home closing-related expenses - Income affordability: There is no hard and fast rule, but the industry standard is to place limits on the combined amount of your existing debt and new home payments, known as PITI (monthly principal, interest, taxes and insurance), compared to your monthly income. While you may find lenders willing to let you borrow more, we strongly recommend keeping total fixed monthly payments to less than 36% of your income.
- Asset affordability: The general rule of thumb is that you should maintain a “cushion” of 3 months’ worth of savings to be able to pay all home and existing debt related expenses. This means that if you lose your job, you will have at least 3 months of savings to continue making home payments while you find alternative sources of income. This cushion is calculated by estimating all of the closing expenses associated with a purchase and determining what amount of down payment can be afforded to maintain these 3 months of cushion.
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| How do you figure out if I should buy or rent? |
Our analysis tells you how long you have to live in a home for buying to make more sense than renting. It compares your net wealth if you were to keep renting to your net wealth if you were to buy. Because there are so many different factors to consider we have built this analysis using our financial modeling technology. Basically, we build one model assuming you buy a property, and a different model assuming you keep renting. These models take into account all aspects of buying and renting including: rent amount, mortgage term, interest rate, mortgage insurance, tax implications of points and mortgage insurance and closing costs among other factors. |
| Are these real mortgages? |
Yes. All mortgages that you see on the SmartAsset site are real, live mortgage rates provided by the mortgage lenders based on your individual circumstances (income, credit score, mortgage amount, home value and location). |
| How does my credit affect my ability to get mortgage? |
Your Credit Score is an important factor in a bank’s decision to lend you money. Your score affects the terms of the mortgage, including the interest rate you need to pay and also the minimum down payment you need to make. Credit Score: Your credit score is a numerical representation of the risk associated with lending you money. The most commonly used score is the FICO (named for the Fair Isaac Company) based on a scale from 300 to 850. The higher the credit score, the lower the perceived risk in lending you money and the better terms you will be able to secure. Your score is based on a number of factors but primarily: - The quality of your payment history (so how many late or delinquent payments have there been)
- A view of your current indebtedness (too much debt hurts your score).
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| What is the tax impact of buying a home? |
When analyzing how your taxes will change we look at two important factors: first, what are the new tax brackets in the location you plan on moving to, and second, how will the new deductions related to home-ownership affect your taxes. Buying a home creates some valuable tax deductions. The key deductions are mortgage interest, real estate taxes, mortgage insurance (if your income is less than $109,000 – don’t worry we do this math for you) and mortgage points. Deductions are valuable because they reduce your taxable income and ultimately the amount of tax you have to pay. The deductions related to home ownership generally decrease over time. Mortgage Interest, which is the primary deduction, decreases over time as the mortgage is paid down (amortize is the fancy word). As the mortgage interest decreases, so does the deduction. You can get a sense for how this changes over time by moving the slider above. We account for the Alternative Minimum Tax ("AMT") as well as all payroll taxes in our calculations, which may cause your effective tax rate to differ from your marginal tax rate. |
