How Much Home Can I Afford? We Show You How to Figure It Out!
Imagine NASA embarking on a space mission to inhabit mars with no proper planning and real-time calculations. Oh! What a bad idea.
Selecting a home with little or no clear idea of what your income can afford is the same as exploring Mars unprepared. Don’t do it!
This article answers the question, “how much home can I afford?”. You’ll get to know what an affordable home is and most importantly, how to use a home calculator.
What’s Affordable Housing?
The term, affordable housing encompasses all housing units that can be easily purchased by those, who earn below the median household income.
This varies from one country to another but regardless of the country, the common aim of affordable housing is to meet the housing demands of middle class households. In developing nations, where the vast majority cannot afford to buy house at the market price, affordable housing becomes a priority for the government and statesmen.
The major factor in determining affordability is the disposable income of the masses. As the population rises, the need for affordable housing increases. The onus of sheltering the masses lies on the government. And the best way to solve housing problems is by emphasising the need for public-private partnerships (PPP). This way, the responsibility of providing cheaper houses is not just saddled on the government but also on private housing agencies.
How to Measure Housing Affordability
According to Bhatta Basudeb, in the analysis of urban growth and sprawl from remote sensing data, “A common measure of community-wide affordability is the number of homes that a household with a certain percentage of median income can afford. For example, in a perfectly balanced housing market, the median household (the wealthier half of households) could officially afford the median housing option, while those poorer than the median income could not afford the median home. 50% affordability for the median home indicates a balanced market.”
The formula for determining housing affordability is different in all countries. But the most accepted is the housing-expenditure-to-income-ratio tool. Currently, the ratio used in the states is 30% while India uses a 40% rule.
Housing Affordability Index (HAI)
The HAI covers the total cost of ownership of individuals home choices. This inclusion of choice depicts the practicability of such methods. It gives us a clear picture of rents and mortgage costs, while considering the hidden costs of choices.
Family Income and Savings
The basic factor to consider while calculating housing affordability is the household income and the distribution of income. The circulation of income determines the volume and effectiveness of housing available in every market economy.
It’s quite easy to understand housing challenges if you can absorb the fundamental concept, which is built on the trends and variations in income and wealth of the vast majority.
The importance of housing is best described if we interview low and middle income households, who view their homes as a great portion of their wealth. Therefore housing is inevitably the sole expenditure that connect the rich, middle-class and poor.
Apart from comparing the percentage of income expended on housing by different households, we can also determine housing affordability by considering the usual hourly/daily wage of full-time workers, who depend solely on their minimum wage.
The household income is not the only factor considered. Other factors like—car loan, student loan payments and the savings available for a down payment— are also important.
Rule of Thumb
Before you purchase a house, it’s advisable to apply the rule of thumb.
The rule of thumb states that every house buyer is required to keep three months of their housing payments, including monthly expenses.
This would help you bounce back, if an emergency arises. You can also use a free home calculator via this link https://www.calculator.net/house-affordability-calculator.html
While purchasing a house, you should know your monthly mortgage payments and compare it with your monthly income.
The precision of your calculations depends on how well you understand the concept of housing affordability. Make sure you digest its basic concept, as explained in this article. Let the rule of thumb guide you while making important housing decisions and make the home calculator your best friend.
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