When an individual is determining how much of a mortgage they can afford on a home, there are many factors that will come into play. There is a process to this and the individual trying to decide how much they can afford must first thoroughly examine their current financial standings.
It is important to first try and figure out yourself how much you can afford to pay on a home, because mortgage lenders have strict guidelines and rules they must follow before you will be granted the loan. Therefore you must take the time to sit down and learn how this process works.
First off, mortgage lenders always are looking for the potential borrower to have a certain debt to income ratio (DTI) to qualify for the amount of loan they are applying for. Generally, these institutions will look for a borrower with a DTI of around 34-38%. For those who are not aware, debt to income ratio applies to the comparison of an individuals monthly expenses to their monthly income.
Many mortgage professionals state that typically about a third of a borrowers income will be dedicated to financing a home. For example, if someone makes an annual salary of $50,000 a year, they should be able to manage a mortgage of $150,000 if their current debt is moderate. While this tends to be a common rule for some, it will not be the case for every new home buyer. Below we will discuss one of the easiest and most effective ways for an individual to decide this.
Use a mortgage calculator to determine how much you can afford.
Lenders tend to use a formula that is very complex to help decide how much a borrower is able to afford. By using a mortgage calculator you will be able to decide for yourself how much you can afford to pay. This type of calculator can be found right here all over the internet and is free to use. Here are a couple of sites that allow you to use a mortgage calculator for free: Mortgagecalculator.org or Mortgagecalculator.net
This tool will allow prospective home buyers to get a good estimate as to what their monthly mortgage payments should be. But be aware that this tool will only be able to give an estimate amount, so because of this many professionals advise to also speak with a mortgage counselor to get concrete numbers.
Here are four easy steps to follow when using a mortgage calculator:
1. Determine the principle balance of the loan you are looking to obtain. This is the figure of the exact amount you will be borrowing. For example, if your looking to buy a property worth $430,000, and you have $430,000 for a down payment, your principle balance will be $400,000. With this number you will then fill in $400,000 in the first box of the calculator that says “mortgage” or “principle” amount.
2. The next step is to fill in the amount of years the loan will be amortized over. Generally, most home mortgage loans are amortized over a period of 30yrs. However, there are other loans out there that will be amortized over 15yrs, 40yrs, and even some 50yr terms. If you are not exactly sure how long you will be repaying the loan, it is always best to just type in 30 years just to be safe.
3. Enter the interest rate you will most likely be paying. Interest rates seem to change daily and because of this it will be hard to determine exactly what this number will be. But on many sites you will find the daily average for a 30yr fixed rate loan and other common types of mortgages. This is probably the best type of loan an individual can obtain, so you may want to enter the common interest rate for this type of mortgage.
4. Once you have completed the steps above, all you have to do is click the button that says “calculate.” Now you have a good estimate as to what you should be paying on the mortgage based on the information you have provided.
A real estate agent will be able to assist you as well and also generally has valuable advice on how much your mortgage should be. But all in all the mortgage lender will have the final say as to how much the monthly payment will be. Remember interest rates and guidelines may also vary from lender to lender so it is always important to first shop around for the best deal before you make your purchase.
