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If you feel like you’re ready to buy a house, the first question you’re likely to ask yourself is “how much can I afford?” Answering that question means taking a look at a number of factors.

Understand Your Debt-to-Income Ratio First

The first and most obvious decision point involves money. If you have sufficient means to purchase a house for cash, then you certainly can afford to buy one now. Even if you can’t pay in cash, most experts would agree that you can afford the purchase if you can qualify for a mortgage on a new home. But how much mortgage can you afford?

The 43% debt-to-income (DTI) ratio standard is generally used by the Federal Housing Administration (FHA) as a guideline for approving mortgages.1 This ratio is used to determine if the borrower can make their payments each month. Some lenders may be more lenient or more rigid, depending on the real estate market and general economic conditions.

A 43% DTI means all your regular debt payments, plus your housing-related expenses—mortgage, mortgage insurance, homeowners association fees, property tax, homeowners insurance, etc.—shouldn’t equal more than 43% of your monthly gross income.2

For example, if your monthly gross income is $4,000, you multiply this number by 0.43 to get $1,720, which is the total you should spend on debt payments. Now, let’s say you already have these monthly obligations: Minimum credit card payments of $120, a car loan payment of $240, and student loan payments of $120—a total of $480. That means theoretically you can afford up to $1,240 per month in additional debt for a mortgage, and still be within the maximum DTI. Of course, less debt is always better.

The average mortgage interest rate (that fee lenders charge as a percentage of your loan amount) has been nice and low lately. In fact, the average rate for a 15-year fixed-rate mortgage dropped to 2.31% in November 2020—the lowest it’s been since Freddie Mac started reporting nearly 30 years ago!4 And now economist geeks think interest rates will continue to hover around 3% in 2021, which is still pretty low.

What Lower Rates Mean for Buyers

Sure, interest rates are low right now—which can help with affordability. Just be careful not to let that pressure you into buying a house when you aren’t really ready. A super low interest rate on a house you can’t afford is still a bad deal. So remember to stick to our advice on monthly payment limit, down payment amount and mortgage type and you’ll be in great shape!

What Lower Rates Mean for Sellers

If interest rates stay low, buyers will be more motivated to buy your home sooner than later. But if interest rates do start to increase later in the year, just plan for your house to be on the market a little longer. If you don’t plan on moving anytime soon, you might still be able to take advantage of these super low interest rates and shorten your payment schedule by refinancing your mortgage.

While many homeowners may be incentivized to restructure their finances by low mortgage interest rates, the decision to refinance your mortgage should be made based on your personal financial circumstances; this week’s mortgage rates should not be the deciding factor on whether or not you refinance is not like a car refinanceThere are things you should know.

There are a few key considerations to review before applying for a home refinance.

1. Know Your Home’s Equity

The first qualification you will need to refinance is the equity in your home. At the end of the first quarter of 2020, home values were still on the rise in the U.S. according to the Federal Reserve Bank of St. Louis. However, as of the third quarter of 2020, the median sales price of homes sold in the U.S. was slightly down as a result of the economic recession caused by the global COVID-19 pandemic.1

Furthermore, according to data reported by CoreLogic at the end of the third quarter of 2020, U.S. homeowners with mortgages saw their equity increase by a total of $1 trillion since the third quarter of 2019, an increase of 10.8%, year over year.2

Still, some homes have not regained their value, and some homeowners have low equity. Refinancing with little or no equity is not always possible with conventional lenders. However, some government programs are available. The best way to find out if you qualify for a particular program is to visit a lender and discuss your individual needs. Homeowners with at least 20% equity will have an easier time qualifying for a new loan.

2. Know Your Credit Score

Lenders have tightened their standards for loan approvals in recent years. Some consumers may be surprised that even with very good credit, they will not always qualify for the lowest interest rates. Typically, lenders want to see a credit score of 760 or higher in order to qualify for the lowest mortgage interest rates. Borrowers with lower scores may still obtain a new loan, but the interest rates or fees they pay may be higher.

Low inventory means you need to be on your toes when you go house hunting—the best homes will likely be snatched up fast. In December 2020, more than 7 in 10 sold homes were on the market for less than a month.3 That doesn’t leave much time to hem and haw over your home search. If you want to find a good home in this slim market, here’s some advice:

• Sacrifice some wants. If you can’t find the house you want, be willing to give up some “nice-to-haves” for your “must-haves.” Find the least expensive home in the best neighborhood you can afford and upgrade over time.
• Expand your search. What if the location where you’re planning to buy is too competitive? You might be surprised at the gem you can find in a less popular neighborhood. Working with a real estate agent who really knows the area is the best way to find a home that fits your budget and lifestyle.
• Get preapproved ASAP. Getting preapproved for a mortgage before you go house hunting is a must in any market. But in a market with such a limited home supply, not doing this legwork ahead of time gives a preapproved buyer free reign to swipe the home you want right out of your hands.

Low inventory means low selling competition! You can probably expect to see offer letters flooding your mailbox the same way Hogwarts sent Harry Potter his acceptance letters. Since your home will be one of the (relatively) few listed on the market, you could be in the driver’s seat. So enjoy possibly picking the best offer and moving at a pace that best suits your timeline.

Buyer demand increased in 2020 as low mortgage rates made the idea of homeownership more affordable and appealing. But if you missed the boat in 2020, should you aim to buy a place of your own in 2021? Here’s why that potentially is — and isn’t — a good idea.

The upside of buying a home in 2021

The primary benefit of buying in 2021? You’re likely to snag a low interest rate on your mortgage.

Though there’s no saying to what extent rates will fluctuate in the course of the year, we know that they’re starting off at historic lows. Plus, the U.S. economy is still in bad shape as we kick off 2021, so based on that alone, rates are unlikely to climb rapidly anytime soon. They may slowly but surely begin to creep up as the year goes on, but all told, rates should stay low for at least another year, if not longer. And the lower your mortgage’s interest rate, the less money you’ll pay each month on your loan, and the less interest you’ll pay all in.

The downside of buying a home in 2021

High demand has driven home prices up, so if you buy in the first half of 2021, you’re likely to pay a premium. That could, in turn, negate a fair amount of your mortgage savings, even if you score an ultra-competitive rate.