Ready to buy your first home? Looking to move up to a better one? Whatever the case may be, your first step is determining how much you can afford. For most people, that means finding out what mortgage amount they can qualify for. Once you know that, you can add your down payment to determine the price range you should be looking at as you shop for your new home. Take the time to gather some information and run the numbers before you begin your home search. This preliminary exercise will save you time and avoid the disappointment of falling in love with a home you really can't afford. If you're not quite ready to "go public" however, just follow the steps below. You may learn you can buy a lot more home than you thought possible. Step 1: To get a rough estimate of your buying power, we'll assume you'll choose a 30-year fixed-rate mortgage. (You may decide later to go for a shorter-term loan with a lower interest rate and higher monthly payment. Or you may opt to take a lower-interest adjustable-rate mortgage, knowing you could end up paying a higher rate in later years of homeownership. Both of these choices would affect how much mortgage you can qualify for.) As a first step though, find out the average interest rate currently available for a 30-year fixed-rate loan with no points. For current rates, check your local newspaper, search online or give me a call. Step 2: Calculate your gross monthly income-the amount you make before deductions. Add your spouse's gross monthly income, if any. Step 3: Multiply the income amount by 36% (.36). This is called the "debt ratio." Step 4: Then subtract long-term monthly payments (more than 10 months), such as car loan payments, personal loans, alimony, child support or regular payments toward a credit card balance. This is the generally accepted standard lenders use to determine what borrowers can afford, after a down payment of 10%. Some lenders and mortgage plans apply more or less strict criteria, such as 33% with a 5% down payment or 38% with a 20% down payment. Step 5: Also, many lenders calculate a "housing ratio" of 28% times gross monthly income. The result does not take into account long-term monthly debt payments. To qualify for a mortgage, lenders may require ratios of, say, 28/36. The first number means the maximum mortgage payment you qualify for could be up to 28% of gross income. The second number means the maximum mortgage payment plus monthly debts could be up to 36% of gross income. Step 6: Take a "guesstimate" of average annual real estate taxes in your area, plus the annual cost of homeowner's insurance. Divide by 12 to obtain a monthly figure. (On average, the monthly cost of these two items might be about one-tenth of 1% of the home's purchase price). Step 7: Deduct the monthly taxes and insurance cost from both figures you arrived at in Step 4 and Step 5. The result is the ballpark monthly payment on principal and interest you can afford to pay on a mortgage. Knowing the amount of principal and interest (PI) payment you can make, you can now calculate the amount of mortgage you would qualify for, at various interest rates.Remember, the price range of homes you can afford is figured after a down payment is added to your qualified loan amount. In addition, you'll need to set aside cash for closing costs and points payments, if any. You should also budget a reasonable amount for moving costs, as well as furnishing and decorating your new home. Whenever you're ready to find your dream home, give us a call!
Sharpen Your Pencils! Determining how much you can afford to finance in today's market requires careful consideration and a bit of math. If you are thinking about refinancing an existing mortgage or buying a home, use these charts to help you plan. Then call us, so we can answer your questions and help you take the next step! Monthly Payment How Much Can You Afford Monthly? Lenders will usually allow you to spend 28% of your total-or gross-monthly income to make mortgage payments of principal, interest, taxes and insurance. The table below shows how much 28% is at various income levels. Annual
Income Gross | Monthly
Income Affordable | Monthly
Payment* | | $20,000 | $1,667 | $ 467 | | $25,000 | $2,083 | $ 583 | | $30,000 | $2,500 | $ 700 | | $35,000 | $2,917 | $ 817 | | $40,000 | $3,333 | $ 933 | | $45,000 | $3,750 | $1,050 | | $50,000 | $4,167 | $1,167 | | $60,000 | $5,000 | $1,400 | | $70,000 | $5,833 | $1,633 | | $80,000 | $6,667 | $1,867 | | $100,000* | $8,333 | $2,333 |
*For incomes over $100,000, add together the appropriate rows. Mortgage Loan Amount Estimator The following table illustrates how your mortgage amount will vary, at different interest rates, even though your affordable monthly principal and interest payment remains the same. Affordable Mortgage Amounts Over 30 Years Monthly
Payment | 5% | 6% | 7% | 8% | 9%(PI) | | $600 | 111,800 | 100,000 | 90,200 | 81,800 | 74,600 | | $800 | 149,000 | 133,400 | 120,200 | 109,100 | 99,450 | | $1000 | 186,300 | 166,800 | 150,200 | 136,400 | 124,300 | | $1,200 | 223,500 | 200,200 | 180,200 | 167,700 | 149,150 | | $1,400 | 260,800 | 223,500 | 210,200 | 191,000 | 174,000 | | $1,600 | 298,100 | 266,900 | 240,200 | 218,300 | 198,850 | | $1,800 | 335,300 | 300,200 | 270,200 | 245,600 | 223,700 | | $2,000 | 372,600 | 333,600 | 300,200 | 272,900 | 248,550 | | $2,200 | 409,800 | 367,000 | 330,200 | 300,200 | 273,400 | | $2,400 | 447,100 | 400,300 | 360,200 | 327,500 | 298,250 |
Figures are approximate for a 30-year fixed monthly payment mortgage after a down payment of 10%. Taxes, homeowners or condominium fees and insurance costs are not included in monthly payment figures. |
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