How Much Mortgage Can You Afford?
February 13, 2008
How Much House Can You Afford? Find Out with the Free Mortgage Calculator
When trying to determine how much you can spend on a new home, it’s best to do your own research. Real estate agents and loan brokers have been known to lead clients astray, especially in competitive markets. During housing boom periods, you may be able to qualify for a $1,000,000 home on a $20,000 salary using a no-income-no-asset loan. But, that doesn’t mean you’ll be able to afford the payments.
This article will show you how generate a reasonable home-cost estimate using our free mortgage calculator. You’ll also learn how to make sure your monthly mortgage payments are affordable now, as well as in the future.
Determining Your Monthly Payment with the Free Mortgage Calculator
The free mortgage calculator can help you determine how much you should spend on a property. Simply enter in some basic information, hit submit, and you’ll receive an estimate of a reasonable amount to spend on your new home.
The free mortgage calculator comes up with this figure by comparing your total income to your total debt (your debt-to-income ratio).The mortgage calculator will also take into consideration the amount you have for a down payment, the loan term you are seeking, and an approximate interest rate.
Additional Homeownership Costs
When determining how much to pay for your home, keep in mind that owning property brings additional expenses. Along with your mortgage payment, you may be charged PMI (primary mortgage insurance). You’ll be charged taxes and home owner’s insurance annually. You’ll also need to cover utilities, home repairs, and yard upkeep. Take these costs into account when determining how much you want to spend on a home - the money can add up fast.
The 36% Debt-to-Income Rule
In order to qualify for a home loan, you will need to meet the debt-to-income ratios set by the lenders. The free mortgage calculator takes these numbers into consideration when estimating a how much you can pay for a home (assuming you enter in all the information correctly, the calculator should give you a number that will be both affordable for you and will satisfy most lenders’ debt-to-income requirements).
The current debt-to-income ratios are set at “28/36.” The first number is the percentage of debt that housing expenses can reasonably take up. The second number is the percentage of debt that can be created from both housing expenses and consumer expenses.
When you add up your monthly mortgage payment, loan interest payments, property taxes, homeowners insurance, and mortgage insurance, the total should not be more than 28% of your gross monthly income (your income before taxes).
Now, take all of the above housing expenses. Add to that your monthly payments for credit cards, car loans, student loans, child support, alimony, and any other long-term financial obligations. The total number should not be more than 36%.
These debt-to-income ratios are guidelines and may be altered depending on your personal circumstance. If you bring a large down payment to the closing table or apply to a unique loan program such as those offered by FHA, you may be able to get away with a higher level of debt.
Determining Your Allowable Debt
The free mortgage calculator can help you instantly determine how much you can afford to pay for your home loan each month. If you’d like to calculate those numbers yourself, use this formula:
Yearly gross income (before taxes) =______
Divided by 12 = _____ (your monthly income)
Monthly income x .28 = ____ (the amount allowed for housing expenses)
Monthly income x .36 = _____ (the amount allowed for housing expenses plus other debts)
Example:
Yearly gross income = $50,000
Divided by 12 = $4,166 (monthly income)
$4,166 monthly income x .28 = $1,166 (allowed for housing expenses)
$4,166 monthly income x .36 = $1,499 (allowed for housing expenses plus other debts)
Affording Your Home Now, Affording Your Home in the Future
When determining how much you can afford to pay for a home, don’t forget about the future. Many borrowers take out low adjustable rate mortgages (ARMs) in order to afford their monthly payments. However, the interest rates on these mortgages almost always go up during the adjustment period. Many homeowners have found themselves stuck with an extremely high monthly payment after the first 5 years of their loan. Sometimes the additional payment amount is over $1,000 a month.
Adjustable rate mortgages are best for people who plan to move in a short amount of time (usually around 2 years or less). If you plan to stay in your home, play it safe with a fixed interest rate. You’ll know exactly how much your monthly mortgage payment will be for the next 30 years.
Using our free mortgage calculator makes it easy to determine how much home you can afford. Take a few minutes now to figure out what a reasonable mortgage will be for you – it’ll be worth it when you have a home you love with a monthly payment that is easy to afford.