In order to have access to the cash for your new, higher housing payments, you will need to reduce the amount of income tax that is withheld from your paychecks. Ask a tax accountant how many additional allowances you should claim on your W-4 form.
So that's an idea of what size mortgage you can afford. Now you need to know what size mortgage you're likely to get. During the real estate bubble, who knows what formula -- if any -- lenders were using to determine people's eligibility. But now lenders are back to using an old rule of thumb called the 28 percent and 36 percent rule.
They say that your total monthly housing costs (mortgage, property taxes and homeowner's insurance) should be no more than 28 percent of your gross monthly income. They calculate that your total housing costs plus long term debt (alimony, car loans, student loans, etc.) should be no more than 36 percent of your gross monthly income. The strictest lenders make you meet both these standards and sometimes use even lower percentages.
One final thought: all these formulas and numbers are important but also keep in mind that real estate is different from other investments. If the numbers look pretty good for you to buy but you are still on the fence, remember that it is not just a house, it's a home. A place where you can paint the walls purple if you want. A place where your kids can build forts. A place of your own.
Do you have more information about this topic? If so, please click here to contact the editors of ABC News.
Quotes delayed 15 minutes for NASDAQ. 20 minutes for NYSE and AMEX. Market Data provided by Interactive Data. Terms & Conditions.
Powered and implemented by Interactive Data Managed Solutions
