Figuring Out How Much of a Home Mortgage You Can Afford
So you’ve found a house which is perfect and you’re ready to buy - but there is that nagging question of whether you can afford the mortgage payments. Don’t be scared off - look into it and determine whether or not you can finally buy that home you’ve always wanted.
1. Look at your finances. What are your assets and what are your debts? Will your income increase over the next few years? What do you project your financial situation will be in five years?
Now examine your debts. How much do you owe? How large are the monthly payments you make towards your debts? Can you afford to pay more towards these debts to pay them off more quickly?
Obviously, you need to be able to count on your income to cover your living expenses, including your mortgage. Make sure to account for expenses which could arise: a new job, a child and other changes in your cash flow picture. You need to plan for the future.
2. If you can manage your debts easily, then you can afford to take on a mortgage. Lenders will be much more likely to approve your loan if your ratio of debt to income is a manageable one.
Lenders like to see payments which are a third or less of your monthly gross income. If your payments are more than this, you’ll want to pay off your debts before you apply for a mortgage.
3. You’ll have to decide between a fixed-rate, adjustable-rate or balloon mortgage. Fixed rates are generally the best choice, since these will not be affected by changes in the mortgage rates. An adjustable rate or balloon mortgage can work out well in the short term, since they tend to have low interest rates, but your payments can dramatically increase later on.
4. Interest rates will vary depending on the movements of the markets. Being savvy about market trends can help you to get the best terms on your mortgage.
5. You’ll have to have your down payment ready. This is usually around 20% of the purchase price of the home. For instance, the down payment needed on a $200,000 home will be about $40,000. You can also find low or no down payment loans, but these can be less than advantageous in the long run.
6. You should have at least three month’s income saved up, along with the down payment before you buy. This savings is to help insulate you from unforeseen expenses which could make it difficult for you to meet your mortgage payments.
There is no single right answer to whether or not you can afford a home mortgage. It all depends on your personal situation - your debts, your income, interest rates and so on. It’s all about finding the home mortgage which meets your needs and fits into your budget.
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