4_Tips_To_Determine_How_Much_Mortgage_You_Can_Afford

Home ownership should make you feel safe and secure, and that includes financially. Be sure you can afford your
home by calculating how much of a mortgage you can safely fit into your budget.

Instead of just taking out the biggest mortgage a lender qualifies you to borrow, consider how much you want to pay
each month for housing based on your financial and personal goals.

Think ahead to major life events and consider how those might influence your budget. Do you want to return to school
for an advanced degree? Will a new child add day care to your monthly expenses? Does a relative plan to eventually
live with you and contribute to the mortgage?

Still not sure how much you can afford? You can use the same formulas that most lenders use, or try another of these
traditional methods for estimating the amount of mortgage you can afford.

1. The general rule of mortgage affordability
As a rule of thumb, you can typically afford a home priced two to three times your gross income. If you earn $100,000,
you can typically afford a home between $200,000 and $300,000.

To understand how that rule applies to your particular financial situation, prepare a family budget and list all the costs
of home ownership, like property taxes, insurance, maintenance, utilities, and community association fees, if
applicable, as well as costs specific to your family, such as day care costs.

2. Factor in your down payment
How much money do you have for a down payment? The higher your down payment, the lower your monthly payments
will be. If you put down at least 20% of the home’s cost, you may not have to get private mortgage insurance, which
costs hundreds each month. That leaves more money for your mortgage payment.

The lower your down payment, the higher the loan amount you’ll need to qualify for and the higher your monthly
mortgage payment.

3. Consider your overall debt
Lenders generally follow the 28/41 rule. Your monthly mortgage payments covering your home loan principal, interest,
taxes, and insurance shouldn’t total more than 28% of your gross annual income. Your overall monthly payments for
your mortgage plus all your other bills, like car loans, utilities, and credit cards, shouldn’t exceed 41% of your gross
annual income.

Here’s how that works. If your gross annual income is $100,000, multiply by 28% and then divide by 12 months to
arrive at a monthly mortgage payment of $2,333 or less. Next, check the total of all your monthly bills including your
potential mortgage and make sure they don’t top 41%, or $3,416 in our example.

4. Use your rent as a mortgage guide
The tax benefits of home ownership generally allow you to afford a mortgage payment—including taxes and
insurance—of about one-third more than your current rent payment without changing your lifestyle. So you can
multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.

Here’s an example. If you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000
monthly mortgage payment after factoring in the tax benefits of home ownership.

However, if you’re struggling to keep up with your rent, consider what amount would be comfortable and use that for
the calcuation instead.

Also consider whether or not you’ll itemize your deductions. If you take the standard deduction, you can’t also deduct
mortgage interest payments. Talking to a tax adviser, or using a tax software program to do a “what if” tax return, can
help you see your tax situation more clearly.