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Determining How Much Mortgage You Can Afford
Dated: January 5 2012
Here are a few tips on getting you started in the right direction to figuring out how much mortgage is right for you. The better you prepare financially, the easier you will find homeownership to be.
1. The basic formula for home affordability.
As a basic rule of thumb, most people can comfortably purchase a home based on 2 to 3 times thier yearly income. So if your yearly income is $100,000, a home priced in the $200-$300,000 range should be attainable. The easiest and most effective way to see how this rule would apply to you would be to sit down and come up with a family budget plan and list all costs of homeownership, such as taxes, utilities, insurance, maintenence, association fees as well as additional costs such as daycare, car loans, student loans etc.
With a clear family budget plan, you will have a much better picture of your financial stability.
2. The initial downpayment.
What is the amount you will be putting down? This is a key factor in not only determining what your monthly payment will be but also if you will be required to pay mortgage insurance and what your interest rate may be. Putting down 20% or more of the purchase price can save you hundreds of dollars a month in mortgage insurance and can also help you get a better interest rate.
Simply put, the lower your downpayment, the higher your monthly mortgage payment will be.
3. Take into consideration your overall debt.
Generally, lenders tend to follow the 28/41 rule. Which means your monthly payments to loan principle, interest, taxes and insurance should not total more than 28% of your gross annual income. And your total monthly bills, mortgage, car loans, credit cards, utilities etc. should not be more than 41% of your gross yearly income.
Example: $100,000 gross income x 28% divided by 12 = $2,333 or less mortgage payment
$100,000 gross income x 41% divided by 12 = $3,416 Max allowable payment for mortgage plus all other monthly bills.
4. Using your rent as a mortgage guide.
Owning a home generally has some tax benefits. If you are renting, you can get an idea of how much of a monthly mortgage payment you can afford simply by multiplying your monthly rent times 1.33. This new number is factoring in the tax benefits that may be available to you.
Example: Rent $1500 x 1.33= $1995. $1,995 should be an affordable monthly mortgage payment.
Again, this is only a guideline and if you are struggling to make your monthly rent, you may have to adjust the numbers to a more reasonable payment.
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