Mortgage Rate News

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In this climate, with low home prices and low interest rates (not to mention a tax credit), it is little surprise that first time home buyers are out in force, looking for opportunities. Mortgage applications are on the rise as would-be home owners look for bargains. But the house hunt brings up all new questions for many. I recently received this question from a house hunter:

How can I tell if I can afford a mortgage payment?

This is a very good question. And it has a lot of different answers. Many gurus will tell you that you should spend no more than 30% of your income on your housing payment. Some of them include maintenance, taxes and mortgage insurance into this lump, and others do not. Personally, I believe that you should consider all of the costs that are likely to crop up. And I think that you should aim for keep your housing costs to 25% – 28% of your monthly income, rather than 30%. (My housing expenses are about 20% of my monthly income.)

Do not get an interest only loan or teaser loan rate just so you can “afford” a payment now. There is no guarantee that you will afford it any better in 3-5 years when the rates reset.

What you need to do is estimate how much your mortgage and interest will be each month, and then add property taxes, maintenance, mortgage insurance and maybe even utilities. While not perfect, this home ownership calculator at Vertex42 is very helpful. You can get a good idea of what you might be able to afford, depending on what house you want to buy. It’s estimate, though, and individual circumstances may very. But it offers a good ballpark figure.

Testing out your mortgage payment

Next, you want to make sure that you can afford the costs of home ownership. In some markets, it is close to the same to rent or buy. In most places, though, you will find that your monthly expenses go up with home ownership. So you want to make sure you will be able to handle it. You can practice making the higher payment for 3-6 months while you look for a home.

First, figure out the approximate monthly cost of home ownership in your price range. Let’s say it’s $1,300 per month. Now, look at your rent payment. Let’s say it’s $850 a month. The difference there is $450. Take that $450 — which is the extra amount you will pay each month — and put it in a high yield savings account. If you can do this without stressing your finances for a few months, chances are that you can afford the mortgage.