Financial, Uncategorized

How Big a Mortgage Can You Really Afford?

Whether you’re a first-time home buyer, you’ve grown out of your current home or maybe you’re looking to downsize after the kids have left home, you may be scratching your head and wondering just how much home you can afford. Home ownership should offer you a feeling of security, not leave you feeling destitute!

So why not just go by lenders guidelines and borrow what they deem appropriate? Well, a mortgage lender won’t take into account your current and future financial goals. Do you plan to have children? You’ll need to factor in childcare costs or maybe the loss of income of one spouse. Maybe you want to return to school eventually. All of these things must be considered!

Old rules generally said you can afford a house 2-3 times your income. So if you earned $100,000 annually, you’d be able to afford a $200,000 – $300,000 home. But what if you have $1,500 a month in car payments, student loan payments, credit card bills? The best way to break down those sort of expenses that are of utmost importance is to make a detailed budget. Factor in things like mortgage payment, homeowners insurance, taxes, HOA fees, utilities, etc.

Now, a huge part of how big of a monthly payment you’ll have is how much of a down payment you can afford. The larger the down  payment, the lower the monthly expense. Many lenders also require private mortgage insurance (PMI) on loans with less than 20% down. You also have to factor in what sort of market it is – if you wait around trying to save, you may end up paying more for a home.

Take into account your monthly debt. Most lenders play by the “43% rule.” So using the $100,000 scenario above, we come to $43,000 in annual income. Divide that by 12 and we get $3,583. That means all bills, mortgage included, shouldn’t exceed that number.

Use your monthly rent as a guideline. Tax benefits of home ownership allow you to spend about 1/3 more than your rent. So if you’re currently spending about $1,500 a month on rent and you’re not struggling to make ends meet, you should be able to comfortably afford about $2,000 a month on a mortgage payment.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s