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  • Chris Heeb, The Debt Dr

How Much Mortgage Can You Afford?


Shopping for a new home is exciting and at times overwhelming. The big question is: What kind of house can you afford? After all, nothing kills the joy of owning a home quicker than drowning in loan payments trying to hold onto it.


Here's a look at how to determine how much house you can afford.


Consider your income - One rule of thumb says your housing costs shouldn't exceed 20% of your gross income (that is the money you make before taxes are taken out). Start by calculating your pretax income, including your salary and any other cash that you have coming in. If your family's annual income is $72,000 or $6000 a month you could afford housing costs of up to $1680 a month.


However, “housing costs” include homeowner’s insurance and property taxes, among other expenses. You'll need to pay these on top of your actual loan amount. When calculating monthly housing costs, make sure to factor in these expenses.


Banks often look at that 28% calculation when deciding how large of a mortgage to offer. But just because a bank will loan you 28% of your pretax income doesn't mean you should accept it. Instead, look at your budget and other financial goals to figure out a monthly payment that feels comfortable.


Factoring your down payment - How much money you're able to put down when you buy has a big impact on your mortgage payment. If you've saved a large amount, say 20% or more, your mortgage costs will be much less than if you make a down payment of 10%. And if your down payment is less than 20%, you will need to pay, and budget for, private mortgage insurance (PMI) .


Identify the wiggle room - Interest payments are a big part of your monthly mortgage expenses and if you can reduce them you'll be able to afford more house with the money available to you each month.


When setting your interest rate, banks will consider your debt to income ratio i.e. your total debt as a percentage of your pretax income. Most banks want to see a debt to income ratio below 35%. That means that the total of your monthly student loans, car loans, credit payments, and the mortgage you're applying for cannot exceed 35% of your salary. Reducing your debt to income ratio by paying off debts can lead banks to offer more favorable interest rates.


Did you know that conventional mortgages typically require a credit score of 620 or above? And, you can qualify for an FHA loan with a score as low as 580. Raising your score by paying off debt can also lead to more favorable interest rates.


But, remember this… whatever interest rate you may get, the banks are still front loading these mortgage loans and you will be paying upwards of 40-75% interest for the first 21 years of the actual mortgage. See Mortgage Exposed


The key to saving as much interest money paid to the lender is to have a game plan that accelerates the payoff of your mortgage, as well as any and all other debts you may have at the time of purchasing your dream home.


Look at this Payoff Summary report where our client will be saving over $172,000 and paying off their mortgage and all other debt in 8.9 years instead of 30 years.



This could be you... For a FREE Payoff Analysis, click here to schedule your no-obligation appointment to learn your exact debt-free date AND the total amount of money you could save, and not handover to your lender. Click here PAYOFF NOW

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