Very often, people buy houses without first knowing what they can really afford – often a costly, life-impacting oversight. Qualifying for a $250,00 mortgage doesn’t mean that you can actually afford that much house. How much you can really afford to pay for a house in Los Angeles is determined by a lot more than mere sale price – your recurring monthly payments and other outstanding debt, for example. And the ongoing costs of home ownership have to be factored in when determining what you can really afford. Let’s take a look, then, at some of the important pieces of this puzzle.
As we mentioned, the existing debt you have (besides the mortgage) will play a large part in how much you can afford to pay for a house in Los Angeles. And this applies especially to credit card debt when budgeting what you can pay for a house. While lenders do take into account all your debts, they look at only your minimum monthly debt payments.
In many cases, you’re likely to reach a point at which you will want to or need to make more than the minimum payments. For example, a $30,000 credit card debt at 18% on which you pay $500 a month will cost you a total of $78,000 over the course of 13 years. You probably wouldn’t make those minimum payments the whole time and wind up paying 2.5+ times more than the original debt.
But debt doesn’t tell the whole story about what you can afford to pay for a house in Los Angeles. Most people have plenty of other expense that doesn’t even figure into the mortgage qualification process, but that is still part of your regular monthly expenses nevertheless. Your ability to afford a house depends on more than just those things that show up on your credit report, for example:
- Car Insurance
- Eating out
What the bank considers debt is only part of the affordability picture. Buying more house than you can afford may force you to cut back drastically in these other areas.
Variable Costs of Owning
In determining what you can pay for a house in Los Angeles, you also have to consider the fact that the cost of home ownership isn’t fixed. Buying and owning a house has associated costs that can vary and often greatly increase. Chief among these are the home owner’s insurance, which can vary from year o year, and property taxes, which almost always increase. And there are costs for maintenance and repairs that inevitably get larger as the property ages, especially when it comes the things like roofs.
Need for Emergency Cash
How much you can actually afford to pay for a house in Los Angeles is also determined, at least in part, by how much in reserve funds you can keep on hand to cover emergencies, especially emergency repairs. Studies show that nearly half of American don’t have enough cash on hand to cover a $400 emergency expense. And keep in mind that a new roof will run you up to $10,000. Short of borrowing this money for a new roof, you would risk being delinquent on mortgage payments if you didn’t enough reserve cash.
Buying a house is a big step and a large financial transaction even for experienced investors. You should, then, before signing the contract, figure out how much you can really afford to pay for a house in Los Angeles. For there’s a lot more to it than just how much your bank is willing to lend.