4 Tips to determine how much Mortgage you can Afford

The most important part of home ownership is affordability – how much can you afford to pay every month as mortgage comfortably? Here are 4 tips to ensure that home ownership will fit in your budget.

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. For example, if you earn $100,000, you can typically afford a home between $200,000 and $300,000.

2. How much can you put down as down payment?

As an example, if you are buying a home for $100,000, and you have $20,000 saved up for down payment, that means you can put down 20% and your loan is for the remaining 80%.

This means that you will not have to pay private mortgage insurance (typically required by all lenders for down payments less than 20%), which may cost hundreds each month.

The lower your down payment, 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.

Simply put:

·        Your monthly mortgage payment (loan principal, interest, taxes and insurance) should not total more than 28% of your gross annual income.
·        Your overall monthly payments for your mortgage plus all your other bills (car loans, utilities, credit cards, other loans) should not 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:

Multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.

For example: If your rent is $1,500 per month, you should be able to comfortably afford a $2,000 monthly mortgage payment.

This is because of the tax benefits of home ownership. However, 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.

However, if you’re struggling to keep up with your rent, consider what amount would be comfortable and use that for the calculation instead.

If all this math is making your head spin, simply give me a call (M 803-348-9922). I am not a mortgage loan officer, but I have several good friends who are and I can introduce you to them. They will take your details over the phone and pre-qualify you.

You can also check out the mortgage calculator on my website www.homesincolumbiasc.net – plug in the price of home and interest rate (it’s up to 4.68% for a 30-year fixed mortgage) and you’ll get a monthly mortgage payment (principal and interest).

Courtesy: Realtor Magazine