Homeownership: HOW MUCH MORTGAGE CAN I AFFORD?
While mortgage calculators and rules of thumb such as buying a home no more than 2.5 times your salary can give you a broad sense of how much you can afford to spend on a home, a more accurate estimate of your housing budget is essential before you make an offer on a home.
Determining your maximum purchase price for a home depends on how
much you have in cash or gift funds or homebuyer assistance programs
for a down payment and how much you can borrow. A lender can pre-qualify you for a loan based on an estimate of your income and credit
profile, but before you seriously begin house hunting, you should get a full
preapproval for a mortgage based on verification of your income and assets, your credit score and your debt.
Decide your own comfort level for your housing payment
A mortgage lender will follow a specific formula – usually with an
automated system – to determine the maximum amount you can borrow.
But even before you meet with a lender, you should review your personal
financial picture and decide for yourself how much you would be com-
fortable paying for a home. There are a couple of ways you can do this.
Your mortgage payment will depend on your loan term and interest rate. In general, a longer loan term will have lower payments, but will usually have a higher interest rate, and you’ll pay more in interest over time because of the term. If you can afford the higher payments, a loan term of 15 or 20 years can be a smart move to build your home equity more quickly.
If you make a down payment of less than 20 percent on a con-ventional loan, you’ll pay private mortgage insurance until your loan-to-value reaches 80 percent.
If you choose an FHA-insured loan, you will only need to make a down payment of 3.5 percent, but you will pay mortgage insurance for the life of the loan. Those mortgage insurance payments could add $100 or more to your monthly housing payment.
VA and USDA loans don’t require mortgage insurance.
A good lender can work with you to compare various loan terms and make recommendations on the best choice for you, and steps you can take to position yourself for a solid financial future.