Home Mortgage: How Much Can You Afford?
With the recession on, and home values low, people realize that now is a good time to buy a home. Mortgage rates are low, and many homes can be had for good prices. It makes sense to get a good deal while you can. But it is essential that you do not make the mistakes that many well-meaning folks made when they bought their homes. After all, part of the reason that home prices are so low right now has a great deal to do with people buying homes that they really couldn’t afford. Before you start home shopping, take some time to figure out how much you can afford for your home mortgage payment.
Figuring out how much of a home mortgage payment you can afford
The easiest way to figure this is by using the following rule of thumb: Your mortgage payment, property taxes and mortgage insurance (if you are putting down less than 20% for a down payment) should all total no more than 28% of your income. You can’t just go on mortgage payment alone. And you have to realize that part of the total cost of the mortgage is the interest you pay. You will need to understand that you won’t get an accurate idea of what buying a home costs if you look only at the purchase price.
You should also consider maintenance and utilities when you are calculating whether or not you can afford a home mortgage payment. Realize that you will have to pay for upkeep on your home, and pay for the electric, heat, water, garbage pickup and other utilities that come with home ownership. While these expenses aren’t normally rolled into the “affordability” assessment, I like to estimate them and add them in. You’re really much better off — no matter what the experts say — if you consider all of your costs and keep them to under 28% of your income.
Also, don’t forget the costs that come with buying a home: Origination fees, closing costs, and other fees.
Type of mortgage loan
Another consideration in the “affordability” assessment is the type of mortgage loan that you get. While it is still possible to get an ARM or an interest only loan to make your payments seem more affordable, these loans can be deceiving. They will reset, and you could find yourself in over your head — ask the hundreds of thousands losing their homes to foreclosure. Instead, get a home mortgage that you can afford using traditional fixed rate mortgages. You are more likely to be able to keep up the payments in the future.
