How much home can you afford?
With interest rates slowly on the rise many people are applying for new mortgages before interest rates reach the point where they would no longer be able to afford a mortgage. Currently a 30 year fixed rate mortgage goes for around 4.25%. However, many in the financial sector are predicting rates could go up to as much as 5.5% by the end of 2014. On a $300,000 loan an extra percentage point would add $3,000 a year in mortgage payments. Purchasing a new home is often the biggest investment many of us will make. When looking to get a new home loan, there are many financial aspects to consider. A main one to consider is how much home can you afford?
Income
To find out if you can afford to take on a new mortgage you need to first calculate your total gross documented income. Be sure to include wages, alimony, income producing investments or any other regular income source that you currently have.
Expenses
Second, calculate your monthly expenses such as car payments, alimony expenses, as well as credit card and other personal debt payments. For revolving credit use the minimum monthly payment and for installment payments use the current monthly payment. Then add everything together.
How much you earn versus how much you must pay out on a monthly basis is called your debt-to-income ratio and it will determine how much a mortgage lender is willing to lend you. Most lenders will not let you go over 28% of your gross monthly income for housing expenses (that also includes taxes and insurance or maintenance fees). In addition, lenders will also not grant you a loan if your debt service plus housing expenses exceed 36% of your gross monthly income.
Finally using one of the many online mortgage calculators, calculate your down payment, the current interest rate and the loan term you are comfortable with. This will tell you your mortgage limit, mortgage payment and as a result the amount of home you can afford.
Deciding when and if to purchase a new home is a big decision. A decision of this magnitude takes careful planning and preparation. If you decide you can afford to carry a mortgage at the current interest rate you might not want to wait to long because interest rates are not the only thing rising in the housing market. The home values are increasing as well.
