How Much House Can You Afford? Find Out Before You Look for a Home Loan
One of the first things a home buyer needs to do before they begin buying a home is figure out just how much home they can afford. This is one of the most important steps in buying a home because down the road you don't want to face financial troubles from having a mortgage you cannot afford.
The amount of home you can afford depends on a few factors. The main factor, naturally, is your income. You income is an important factor because lenders want to know that you can afford to pay your mortgage and not go through foreclosure in the long run because you are unable to pay your mortgage. Ideally, the total cost of housing, whether renting or buying, should be about 30% of your income or lower. What this means is that if you make $5000 a month, you can afford to pay about $1,670 for housing costs. There are many aspects to housing costs besides the home loan itself. Insurance and taxes are the most notable and will depend on the area you live in. Additionally, these are not costs that can be avoided.
Next to your income and housing costs, there is the home loan itself. The home loan is not simply the cost of the house, but includes interest. Essentially, the lower the interest rate the better in terms of the monthly mortgage payments. In many cases, your mortgage rate will depend on many factors including your credit rating. One of the factors is the number of points you pay on the loan. Points are fees on the loan that a borrower pays when the loan is closed. In general, the more points you pay up front, the lower your interest rate will be overall. Be sure to ask any lender about their points schedule. You may be able to get a lower interest rate by paying more points. Additionally, if your savings is low, you might want to opt for a higher interest rate with zero points. You may be able to refinance later at a lower interest rate depending on the the prevailing interest rates.
To summarize, before you start shopping for a home and a home loan, you need to have a good idea how much home you can afford. First, figure out how much you have saved for a down payment and the number of points you might reasonably be able to pay to get the lowest interest rate possible. Calculate points at about $1000 per point. The actual fees will vary depending on your mortgage lender. Next, figure out how much you can afford based on the 30% rule. Remember that this amount will be for the mortgage, home insurance and taxes. By doing this, you will have a good idea about how much how you can afford.
This home loan calculator will help you figure out how much house you can afford >> Home Loan Calculator <<
Next Article: Interest Only Mortgages