Tips for Finding Out How Much Mortgage You Can Afford

There’s no use getting a mortgage before you’re financially ready to own a home. If you do so, you may end up losing the home after a while when you’re no longer able to keep up with your mortgage payments. 

Fortunately, there are mortgage calculators available online that one can use to know how much they could pay in a mortgage. People taking out a reverse mortgage could use a reverse mortgage calculator to know how much they’ll be getting in a reverse mortgage. Unlike conventional mortgages, reverse mortgages are tailored towards people 62 years old and over who own a home. With this type of mortgage, the borrower gets paid when the mortgage is approved. 

For conventional mortgages, you must first find out how much you’ll be required to pay monthly and use the following tips to know if you can afford to make those payments.

Calculate Your Total Budget

There is a good general rule that you can get a mortgage that’s 2-3 times more than your gross income. This means if you’re earning about $4,000, then, on average, you can get a mortgage of $8,000-12,000. However, one must take into consideration, other expenses that may make it more difficult to meet up with mortgage payments. Such expenses include pre-existing debts, e.g.; student loans, credit cards, cars, and insurance. All these add up to make up the true cost of home ownership.

You can get a joint account with your partner (or family) to solve this, this way you manage your expenses with the help of someone else. You can pay for the mortgages, while your partner can take care of debts.

Take into Account Your Total Debt

The general rule is that your home’s monthly mortgage payment, which includes tax, insurance, principal, and interest, shouldn’t be more than 28% of your gross income annually. There are lending organizations and services that grant you a mortgage with monthly payments that is 30-40% of your gross income but you should avoid that, as it creates an imbalance in your finance.

If you’re earning pre-tax $50,000 per year, then the 28% rule states that your expenses including mortgage shouldn’t go above $1,166. The debt-to-income ratio (DTI) of 28% is enough to pay for your mortgages while allowing you some flexibility to take care of other expenses and even put away some money as savings.

Don’t Forget Your Down Payment

How much you put down as a down payment determines the amount of money you’ll have to pay as monthly payments. The higher your down payment, the lower the monthly payments. If you pay a down payment lower than 20%, then you have to consider the amount of money you’ll spend getting Private Mortgage Insurance (PMI). This insurance protects the lender from any harm if you ever default on the loan. If you pay a down payment higher than 20%, you may not be required to get a PMI.

It’s important to realize that interest rates are always fluctuating. If you’re saving for a down payment, then it’s possible that the rates are going higher. Therefore it’s good to consider the possibility that you may have to pay more than previously planned.
Factor in the Closing Costs

Closing costs are the costs given to third parties to finalize the deal. These costs are usually 3-4% of the purchase price of your house. Closing costs are important in this process as they constitute, appraisal fees, house inspection, loan origination fees, credit reports, attorneys, insurance, and taxes. If you’re creating a budget for your new home, make sure to add 4% of closing costs. For example, if the house is worth $100,000, then additional 4% closing costs would make it $4,000 which you would have to give along with the down payment of 20%. Your total would be $24,000.

To pay lower amounts as closing costs, you may want to aim for a more affordable mortgage.

Remember the Additional Homeownership Costs

Getting a mortgage isn’t the only money guzzler, buying a house and maintaining it is also an equally big problem. You would need to add costs for maintenance, repairs, and upgrades. You would need $400, on average, for repairs. $3,200 annually for maintenance (pest control and landscaping) and heavy upgrade costs for remodeling the interior. For example, a kitchen remodel can cost around $26,000.

These expenses will surely come through, especially if you’re a first-time buyer. If the costs seem too expensive, then you can always look at more affordable houses or put off buying a house for now.