By knowing how much mortgage you can handle, you can ensure that home ownership will fit in your budget.
Homeownership should make you feel safe and
secure, and that includes financially. Be sure you can afford your home
by calculating how much of a mortgage you can safely fit into your
Instead of just taking out the biggest mortgage a lender
qualifies you to borrow, consider how much you want to pay each month
for housing based on your financial and personal goals.
ahead to major life events and consider how those might influence your
budget. Do you want to return to school for an advanced degree? Will a
new child add day care to your monthly expenses? Does a relative plan to
eventually live with you and contribute to the mortgage?
not sure how much you can afford? You can use the same formulas that
most lenders use, or try another of these traditional methods for
estimating the amount of mortgage you can afford.
1. The general rule of mortgage affordability
As a rule of thumb, you can typically afford a home priced two to
three times your gross income. If you earn $100,000, you can typically
afford a home between $200,000 and $300,000.
To understand how
that rule applies to your particular financial situation, prepare a
family budget and list all the costs of homeownership, like property
taxes, insurance, maintenance, utilities, and community association
fees, if applicable, as well as costs specific to your family, such as
day care costs.
2. Factor in your downpayment
How much money do you have for a downpayment? The higher your
downpayment, the lower your monthly payments will be. If you put down at
least 20% of the home's cost, you may not have to get private mortgage
insurance, which costs hundreds each month. That leaves more money for
your mortgage payment.
The lower your downpayment, the higher the loan amount you’ll need to qualify for and the higher your monthly mortgage payment.
3. Consider your overall debt
Lenders generally follow the 28/41 rule. Your monthly mortgage
payments covering your home loan principal, interest, taxes, and
insurance shouldn’t total more than 28% of your gross annual income.
Your overall monthly payments for your mortgage plus all your other
bills, like car loans, utilities, and credit cards, shouldn’t exceed 41%
of your gross annual income.
Here’s how that works. If your
gross annual income is $100,000, multiply by 28% and then divide by 12
months to arrive at a monthly mortgage payment of $2,333 or less. Next,
check the total of all your monthly bills including your potential
mortgage and make sure they don’t top 41%, or $3,416 in our example.
4. Use your rent as a mortgage guide
The tax benefits of homeownership generally allow you to afford a
mortgage payment—including taxes and insurance—of about one-third more
than your current rent payment without changing your lifestyle. So you
can multiply your current rent by 1.33 to arrive at a rough estimate of a
Here’s an example. If you currently pay $1,500
per month in rent, you should be able to comfortably afford a $2,000
monthly mortgage payment after factoring in the tax benefits of
However, if you’re struggling to keep up with
your rent, consider what amount would be comfortable and use that for
the calcuation instead.
Also consider whether or not you’ll
itemize your deductions. If you take the standard deduction, you can’t
also deduct mortgage interest payments. Talking to a tax adviser, or
using a tax software program to do a “what if” tax return, can help you
see your tax situation more clearly.
G.M. Filisko is an attorney and award-winning writer who’s owned her
own home for more than 20 years. A frequent contributor to many national
publications including Bankrate.com, REALTOR® Magazine, and the
American Bar Association Journal, she specializes in real estate,
business, personal finance, and legal topics.
Author:Melissa Fairley Phone: 214-549-6460 Dated: August 3rd 2014 Views: 1,511 About Melissa: About Halo
We understand that for many people, buying or selling a home is probably the largest i...
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