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Written by Brian Daniel
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Monday, 30 October 2006 |
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Word Count: 876 Can You Afford A House?
The time has come to buy a house. Questions buzz around in your head like a
swarm of angry bees: “How much can I borrow? How much do I have to put down? How
much will my payments be?” Well, let me suggest starting with the “How much can
I borrow?” question. I know you should never answer a question with a question,
but in this case we need to ask a few more questions in order to figure out how
much you can borrow.
There are many factors you need to take into consideration when purchasing a
home. First and foremost, ask yourself what size monthly payment you can afford.
When determining how large a mortgage you can afford, be sure to factor in all
your current expenses such as car payments, credit card bills, student loans,
utilities, and the like. You may also want to factor in how much you spend on
things like entertainment, eating out, and traveling. You don't want to add a
mortgage payment and say goodbye to your social life. Instead, you want to make
sure that you're not overextending yourself financially so you can enjoy a good
quality of life.
At the present time, most lenders will allow for a whopping debt-to-income ratio
of 45% - 50%. Your debt-to-income ratio is the sum of your mortgage payment and
any other credit card or loan payments, divided by your monthly gross income.
Lenders use this ratio to help determine your credit worthiness. All of your
revolving debts along with your mortgage payment divided by your monthly gross
income should not exceed the 36% - 45% debt-to-income ratio. Here’s a quick
formula to help you figure out how much you can afford to put toward your
monthly house payment:
--Multiply your gross monthly income by 0.45
--Subtract your non-mortgage debt payments from the result
--What's left is your allowable mortgage payment
So, if we have a couple with a combined monthly gross income of $5000 and they
pay $700 a month toward two auto loans and one credit card, they would qualify
for a monthly payment of $1550.
In case you don’t know, not all of your monthly housing payment goes toward your
principal and interest. A portion must go toward homeowner's insurance and
property taxes. I mention this because on most mortgage calculators that’ll you
use, you’ll need to enter these figures to get an accurate idea of what your
real monthly mortgage payment will look like, and you’ll need the numbers to
figure out how much of a house you can afford.
Property taxes are typically a percentage of your home's assessed value. To
calculate property taxes, local jurisdictions generally multiply the tax rate by
a home's assessed value. For example, if you pay 0.5% in property taxes of the
assessed value, a home assessed at $250,000 would have a yearly property tax
bill of $1,250. In order to find out the tax rate, you will need to contact your
county tax assessor, or a local mortgage broker or bank may be able to assist
you. As for the homeowner’s insurance, your best bet is talking to a local
broker or bank to get a general idea of what it is for your area. Mortgage
calculators will ask you for a percentage rate sometimes and others will ask for
a yearly figure. It can be confusing for a new buyer; so don't be afraid to seek
a little assistance.
Figuring out how much you can afford to put toward your monthly house payment is
a start. Now, you want to know how much house you can afford. There are mortgage
calculators galore that will help you do this, but, as I mentioned above, they
will require you to enter real estate taxes, homeowner’s insurance, and interest
rates.
Once you know how much you can comfortably spend a month toward a home, and
you’ve gathered your tax and insurance rates, you only need an idea of what kind
of interest rate you’ll get. You can probably kill three birds with one stone by
trying to get rates for the taxes, insurance, and interest rate in one phone
call. Once you have an idea of what your interest rate may be, you can plug in
all your numbers on any of the numerous mortgage calculators on the internet to
get a good idea of what you think you can afford.
Afterwards, if you like, you could call a local bank or broker and get
pre-qualified to see if you’re in the ballpark. If your figures are similar,
congratulations on a job well done. If your results are different, take the time
to figure out why and don’t be afraid to ask questions. Remember, buying a house
is one of the biggest financial decisions of a person’s life. You owe it to
yourself to be as thorough as you can. The fact that you’re reading this article
attests to that, so good luck and happy house hunting.
______________________________________________________________
Brian Daniel is a loan officer for
http://www.bendmortgagegroup.com, a mortgage company in Bend, Oregon. He is
also the company's marketing coordinator. For more articles visit
http://www.bendmortgagegroup.com/Articles.
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