You should know your mortgage payment limits if you want your home ownership to fit within your budget. Ideally, you should have a stable financial condition before buying a home. In order to calculate how much mortgage payment you can comfortably afford, you should use the same mathematical formulas that lenders use.
Here are some things you need to do to determine how much mortgage you can afford:
Calculate your mortgage limits
As a general rule, you can buy a home priced 2 or 3 times your total annual income. So, if your annual income is $200,000, you will be able to buy a home within the $400,000 – $600,000 price range.
However, this is the general rule. To know how this rule applies to you, you should prepare a list of your expenses and other costs of homeownership including insurance, property tax, utilities, maintenance etc. You also need to consider other costs that may be specific to your family.
Consider your down payment
Calculate how much down payment you can make. If you can make a higher down payment, the EMIs on your mortgage will be low. If you manage to contribute at least twenty percent of the value of the property, you will not have to buy private insurance. Private insurance may cost hundreds of dollars each month. If you can avoid it, you will have more money for making your mortgage payment. On the other hand, if your down payment is low, you will have to get a higher mortgage.
Calculate your overall debt
Most lenders follow the 28/41 rule – the EMI on your mortgage shouldn’t exceed 28% of your annual income. In addition, your overall monthly expenses including your mortgage payment, car loans, credit cards, utilities, and other bills shouldn’t exceed 41% of your annual income.
Consider this example: Your annual income is $120,000. Divide that number by 12 to get your monthly income. Now find out the 28% of that figure and you will get $2,800. This is the highest amount you can set aside for making your mortgage payment each month. Now consider all of your expenses. They shouldn’t exceed $4,100 in your example.
Calculate your mortgage affordability using your rent
Homeownership comes with several tax benefits. As a result of this, you should have no trouble making a mortgage payment of about 1/3 more than the rent you are currently paying. So, for example, if you are already paying $2,000 as rent, you will be able to pay around $2,660 as mortgage payment. However, if you are already struggling to pay your rent, you should calculate what amount you can comfortably afford.
While calculating your eligibility for tax deductions, here are a few things to keep in mind. If you are taking the standard tax deduction, you won’t be able to deduct your mortgage interest payments. If you have trouble understanding your tax situation, you should talk to a tax advisor.
Your homeownership should bring with it a sense of safety and security and that includes financial security. Before making an offer you should know, if you can afford that house by finding out how much mortgage payment you would be able to handle. The lender may be willing to offer a bigger mortgage, but you should know how much money you can set aside each month for paying the EMI on your mortgage.
Once you’ve determined how much mortgage you can afford and have your sights set on your dream home, you can obtain a free home valuation report from Neighborhood IQ to find out how much the property is worth. Also, the Home Loan Advisor can analyze your property, current market conditions, local market comps, and other variables in our proprietary algorithm, and match you with potential lenders.