Lending Club Blog

How Much Home Can You Really Afford?

Go to nearly any bank or mortgage website and you’ll likely find a calculator for how much house (i.e., mortgage) you can afford. While the result will likely be a number large enough to put you into the home of your dreams, you’ll have to decide if that dream is worth the price.

The question that arises is whether or not you should borrow the full amount, or anywhere near the full amount, that is offered to you. What the calculators typically do is determine the maximum amount that you would be able to survive paying each month. Taking such an amount is basically asking the bank to place you on the brink of financial disaster. If anything should interrupt your assumed income or expenses, even temporarily, then you would likely not be able to afford your home any more.

Like so many aspects of personal finance, there is a mindset that can predispose borrowers to taking on too much debt. The question to ask yourself is: Would you rather live in a house that you can easily afford or in a “better” house that you can barely afford?

To get around the problem of taking on more than you can comfortably afford, I recommend the following course of action: When using an online calculator, factor in your savings goals. When you are entering monthly expenses, increase one of them to include your desired savings. That savings goal could be what you hope to invest in P2P loans at Lending Club, place in your savings account each month, contribute to your retirement plan, or have available if an unexpected expense should occur. You could even add in the sum of all such expenses.

By treating your savings goals as an expected expense, you’ll be shown how much house you can afford while still maintaining healthy savings habits. If your assumptions later turn out to be flawed, you would have the option of reducing your savings allocations rather than losing your home.

Proper planning when determining how much to spend on housing can offer you flexibility in times of trouble. Rather than buying a house at the absolute limit of what you can afford, using some self-control and including your savings goals in your calculations will likely leave you in a much better financial position.

Tuesday, December 11th, 2007 at 5:46 am

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