Make Sure You Can Truly Afford The Mortgage Before You Buy The Home

When you are searching for the perfect home, it is all too easy to over-buy and end up with more home than you can actually afford. Then, you end up house-poor -- strapped for cash each month because your mortgage takes up such a big percentage of your income. To avoid this situation, follow these tips during your house-hunting process to ensure you can truly afford the mortgage on the home you're about to buy.

Know how much taxes and homeowner's insurance cost.

Usually, when you make your monthly mortgage payment, you also make a payment towards taxes and homeowners insurance. Your mortgage company keeps that money in escrow and pays it to the respective parties when it becomes due. If you only look at the cost of the mortgage itself, it may seem affordable -- until you realize that there's another $500 per month in taxes and insurance costs to tack on. When looking into mortgage payment costs for a home, make sure you include the cost of taxes and insurance in your calculations, too.

Stick to the one-third rule.

Many financial experts recommend that your mortgage payment be no more than one-third of your monthly income. Lenders, however, will often be willing to lend you an amount that results in your mortgage payment being up to one-half of your income. You're going to feel over-burdened if your mortgage payment takes up more than one-third of your income, so stick to that more conservative guideline. If you have a lot of other debts, in fact, you may want to restrict your payment to only one-quarter of your income. 

Don't count on raises.

Some people take out a mortgage they can barely afford and figure that they will get a raise, making that mortgage more affordable in a year or two. But what happens if you never get that raise? Do not count on future changes in income when taking out a mortgage. Make sure the payment is something you can afford here and now.

Include PMI, if applicable.

If you do not put down at least 20% of the cost of the home, you will often have to pay what is called private mortgage insurance, or PMI, each month. This isn't terribly expensive. It often equates to about $100 a month. However, it is something you need to consider if you are buying a home with less money down.

For more information, contact a company like Rio Grande Credit Union.

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