How big should your mortgage be - tradeprofinances.com

How big should your mortgage be

## How Much House Can You Afford?

Determining how much mortgage you can afford is a critical step in the homebuying process. It involves assessing your financial situation and considering several factors to ensure you make an informed decision that aligns with your long-term financial goals.

### Factors to Consider

**1. Income:** Your monthly gross income is the starting point for calculating your affordability. Lenders typically consider 28/36 rule, which states that a maximum of 28% of your gross monthly income should be allocated towards mortgage payments, and 36% towards total debt payments (including mortgage, car loans, credit cards, etc.).

**2. Debt Obligations:** Existing debt payments, such as car loans, student loans, and credit card bills, reduce your available income for mortgage payments. Lenders will factor in these obligations when determining your debt-to-income ratio (DTI), which should not exceed 36%.

**3. Down Payment:** The amount of down payment you make directly impacts your mortgage amount and monthly payments. A larger down payment reduces the loan amount, resulting in lower monthly payments and potentially a lower interest rate.

**4. Interest Rate:** The interest rate on your mortgage determines the cost of borrowing over time. A higher interest rate increases your monthly payments and the total amount of interest paid over the life of the loan.

**5. Loan Term:** The loan term, typically 15 or 30 years, influences your monthly payments and total interest paid. A shorter loan term results in higher monthly payments but lower total interest paid, while a longer loan term has lower monthly payments but higher total interest paid.

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**6. Property Taxes and Insurance:** These ongoing expenses are added to your mortgage payment. Lenders typically escrow these amounts, meaning they are collected monthly and paid on your behalf.

### Calculating Your Affordability

To estimate how much house you can afford, follow these steps:

**1. Calculate Your Gross Monthly Income:** Add up all sources of regular income, including wages, salaries, bonuses, and commissions.

**2. Determine Your Debt-to-Income Ratio (DTI):** Add up your monthly debt payments (minimum payments on all credit accounts) and divide by your gross monthly income. Aim for a DTI below 36%.

**3. Adjust for Down Payment:** Determine the amount of down payment you can afford. A larger down payment will reduce your loan amount and monthly payments.

**4. Get Pre-Approved for a Mortgage:** Contact a lender to get pre-approved for a mortgage amount based on your financial situation and affordability. This gives you a better understanding of how much you can borrow and helps you in negotiations.

**5. Factor in Ongoing Expenses:** Estimate the monthly costs of property taxes, homeowners insurance, and any other ongoing expenses related to homeownership.

### Example Calculation

Let’s say you have a gross monthly income of $6,000, a monthly debt payment of $500 (including car loan, credit cards), and a down payment of $50,000.

**Step 1: Calculate DTI**

DTI = $500 (monthly debt payments) / $6,000 (gross monthly income) = 8.33%

**Step 2: Calculate Mortgage Affordability**

According to the 28/36 rule, you can allocate a maximum of 28% of your gross income towards mortgage payments.

Mortgage payment = $6,000 (gross income) x 0.28 = $1,680

**Step 3: Factor in Down Payment**

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Loan amount = $300,000 (home price) – $50,000 (down payment) = $250,000

**Step 4: Estimate Monthly Payments**

Assuming an interest rate of 4% and a 30-year loan term, your monthly mortgage payment would be approximately:

Monthly payment = $250,000 (loan amount) x 0.04 (interest rate) x (1 – (1 + 0.04)^(-360) / 0.04) = $1,236

**Step 5: Add Ongoing Expenses**

Assuming $150 for property taxes and $100 for homeowners insurance, your total monthly housing expenses would be:

Total monthly housing expenses = $1,236 (mortgage payment) + $150 (property taxes) + $100 (homeowners insurance) = $1,486

**Conclusion:** Based on these assumptions, you could afford a home priced around $300,000 with monthly housing expenses of $1,486. However, it’s important to note that this is just an estimate. Your actual affordability may vary depending on your individual financial situation and other factors.

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