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How much house can you really afford?

Is this the year you make the leap and purchase a new home? Even as interest rates and home prices inch up, buying a home can still be the better option over renting. One of the biggest benefits of home ownership is the ability to build equity over time. Then there are the tax deductions. Not to mention the freedom to make your house your home. (When you rent, you can’t just knock out a wall or paint the front hall eggplant, right?)

So, the first question is determining how much house you can afford. The industry rule of thumb is to aim for a house that costs about 2.5 times your gross annual salary and to have a debt-to-income ratio no higher than 43 percent of your monthly income. “Debt” includes your mortgage, as well as any installment or revolving credit.

Online calculators, such as are a good place to start; however, the math isn’t as simple as plugging in the cost of a house and dividing it by 360 months (a 30-year mortgage). There are other factors that influence how much mortgage you’ll qualify for.

“There are other costs that go into a mortgage payment besides principal repayment,” says Julie Picone DeGlopper, retail sales manager in M&T Bank’s Mortgage Department. “Property taxes, homeowners’ insurance and private mortgage insurance must also be factored in.”

Then there’s the down payment amount. Typically, three percent is the minimum down payment allowed; however, to avoid paying private mortgage insurance (PMI) – which can add $50 or more to your monthly payment – ideally you’d want to put down at least 20 percent of the asking price.

Which term works best for you? Do you want a 30-year mortgage or a 15-year mortgage? A fixed rate or a floating rate? “You’ll typically qualify for more with a fixed-rate, 30-year mortgage,” says DeGlopper. “Your monthly payments will be lower with a fixed rate, and you can always pay down your principal whenever you have extra cash.”

Of course, with any home purchase, there are closing costs. These typically include an appraisal, credit report, lender’s attorney fees, NYS mortgage tax, title insurance and recording/filing fees and can add up to several thousands of dollars.

Once all those costs are on the table, you should next consider the ancillary expenses of home ownership: anticipated or expected repairs or improvements, appliance, furniture and other purchases (such as a lawnmower), etc. A home inspection will help determine when you might need a new roof, furnace, water heater, etc.

“It’s smart to have a house emergency fund for large purchases or unexpected expenses,” says DeGlopper. “That way, you won’t be caught off guard.”

While there is no way to avoid paying closing costs, there are programs available to assist qualified first-time homebuyers help pay for those costs through grants, down payment assistance or an unsecured loan, says DeGlopper. Some will allow you to qualify for a more expensive home by offering a lower interest rate. M&T also features a First Home Club, where the amount of money you save is matched with a home loan grant of up to $7,500.

“As long as you’re going into the buying process with your eyes wide open, know what’s expected and what questions to ask, the process of buying a home should move smoothly,” says DeGlopper. “The first step to take is to talk to a lender and get pre-approved. Then you can look for your dream home with confidence.” n

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