What Can I Afford?

Whether you’re buying a home for the first time or considering a move into a new home, how much you can afford—in terms of a mortgage and general housing expenses—is the biggest calculation you’ll need to make.

To figure out how much you can afford, first you’ll need to calculate how much of your gross monthly income can go towards your mortgage. When doing the math, your goal is to have your monthly mortgage payment not exceed 28 percent of your gross monthly income, although that percentage isn’t necessarily set in stone. However, if your calculations come to quite a bit more than 28 percent, then you may need to scale back on how much you can afford in terms of a monthly mortgage payment.

Next, figure out your total debt and what percentage of your gross monthly income goes to that debt. This calculation will give you a rough estimate of your total household expenses. As a rule, your total debt should be no more than 36 percent of your income. Much like your earlier calculations with your monthly mortgage payment, 36 percent is just a general guideline and you may come in over or under that number by a couple of percentage points.

Once you’re comfortable with those figures, take into consideration general expenses directly relating to your new home. Not only should you look at one-time expenses such as moving and renovations, but—more importantly—also look at general homeowner expenses that you may incur each month such as maintenance, homeowners’ association fees and unexpected home repairs. For this, it’s a good idea to budget in 30-40 percent more than your monthly mortgage payment.

Finally, after you’re done with your own budgeting, you’ll need to get a pre-approval from your lender. With a pre-approval, a lender determines how much they are willing to lend to you by assessing your income, assets, employment and credit history. Once you have a pre-approval, you’ll know what your price range is for buying a home. Keep in mind that the purchase price of your new home doesn’t need to be the same as what your lender is willing to lend—it’s okay to buy a home that’s less than what you’re approved for.

The key to not overextending yourself is to make sure to leave plenty of space in your budget for unforeseen costs and expenses. If you’re going to err, make sure you err on the side of affordability. ∆

 

© Left Field Media


What is an Adjustable Rate Mortgage and What Are the Benefits?

If you’re trying to find a loan, especially to purchase real estate, you’ve probably heard of the adjustable rate mortgage. You may be wondering why it would be good for you, or maybe even what it is. Let’s answer a few of your questions here.

What is an adjustable rate mortgage?

An adjustable rate mortgage is actually almost as simple as it sounds. The bank will give you an initial interest rate for your loan, but as time goes on, this rate will probably change. Of course, it’s not just up to the banks to choose whatever mortgage rate they want. The rate will depend on one of several indexes, so the rate can go up or down. Most of these indexes are similar, so it doesn’t make much difference which one the bank chooses, but you should still find out which one your loan will follow and why the bank chose that one.

The benefits

Using an adjustable rate for your mortgage can be very helpful to you. For example, because the bank considers you to be taking the risk when you accept an adjustable rate loan, it will often give you a lower initial interest rate. An adjustable rate loan is great if you think that interest rates are likely to go down, or even stay about the same, over the course of the loan. It also might be a good choice if you don’t plan to hold onto the property for very long.

Are you considering an adjusted rate mortgage? Contact us. We’re experts and can help you with everything that you need.