How Much Mortgage Can I Afford: A Brief Overview
The question “how much mortgage can I afford” is faced by everybody who wants to buy a home for the first time. The usual rule of thumb for answering this question is your gross income for one week. However, due to the tax benefits of home ownership, it is actually more than that. A practical guideline is 31% of your gross annual income. Therefore, if your gross household income amounts to $150,000, then you are able to afford up to around $46,500 every year for mortgage payments. If you divide it by 12 months, it comes to $3,875 every month.
Why Should You Ask Yourself “How Much Mortgage Can I Afford”?
Nevertheless, the hidden fact that the mortgage lenders and banks don’t wish to inform you is that $3,875 every month has to incorporate more than just the loan repayment. The payment should comprise:
1) Repayment of the principal balance of the loan
2) The interest for the loan
3) Real estate taxes (for instance, ad valorem taxes)
4) Any homeowner’s association fees (if you stay in common element condominiums)
5) Homeowner’s insurance premium
6) Any escrow fees necessitated by the lender
Therefore, let’s take into consideration the following. Suppose that the amount of your real estate taxes is $250 every month and it is equal to your homeowner’s insurance. The total is $500 per month. Now suppose you stay in a common elements condominium and you have to pay $100 for that every month. The total comes to $600 every month. It is believed that there are no escrow funds to earmark.
The total is $600 every month. You are able to afford $3,875 every month. If you deduct $600 from it, it comes to $3,275. If you acquire a mortgage with an interest rate of 4.5% and a repayment term of 30 years, then you are able to borrow around $391,000. You should keep in mind that this is a fixed rate mortgage loan. The interest rate remains constant throughout the duration of the loan.
One more advice. Only since you’re able to borrow $391,000 does not suggest you must borrow $391,000. You perhaps have a student loan, credit card debts and contingencies can arise anytime. In addition, you have your retirement objectives to finance and higher education for your kids to consider. Hence, it is always prudent to borrow a lower amount than what you can manage to pay off.
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