When considering all of the factors that go into the homebuying process, deciding how much to take out for a mortgage can be one of your biggest decisions. You might be asking, “Just how much mortgage can I afford to borrow?” “How does the mortgage affect other expenses?” or “How much should I put towards the down payment?” Knowing how much you can comfortably afford will help the rest of the homebuying process go smoother, allowing you to search, bid, and buy confidently. With some effort you can rest easy knowing that your wise decision is serving you well for years to come.
First, look up a good online calculator. A single search will bring up dozens of results, many of which will allow you to input different variables such as your annual income, down payment, interest rate, tax, insurance, and years until loan payoff. Try several calculators to find the best one for you and compare your results across the board.
Adjust the figures for your needs and try out different options, taking into consideration that a slightly higher monthly payment or a larger down payment might save you hundreds or even thousands of dollars in interest over time. Different rates of interest as well as plans which require insurance also affect the bottom line, and the rate at which you are able to pay off your loan (15 years compared to 30) will also affect long term savings. Research different payment plans that you are eligible for and spend an hour or two finding the best plans for yourself, keeping them around for your future decision.
Second, do some of your own calculations. Track your current income as well as your current debt burden. The amount and type of debt that you hold will affect the types of loans you can qualify for, so do some research and make a list of the loans you are interested in and eligible for. Credit score will also play a big factor in your ability to take out a mortgage, so be sure to order an online credit report so you can make your bid with confidence. If you have some time before the purchase, minimize these debts as much as possible by paying off or closing down extra credit card accounts and chipping away at larger debts such as student loans and car payments. Your income, debt burden and credit score will all help you answer the question, “How much mortgage can I afford to borrow?”
Third, take the unexpected into account. Consider the likelihood and potential additional expenses that come with significant life changes such as a career change, illness, the birth of a child, or a child going to college. Your mortgage payment plan should be able to provide you with enough cushion to allow flexibility and transition for yourself and your family. Additionally, calculate potential rates from lenders including insurance (if cancelling your insurance is an option, both before and after reaching 20% equity), upfront fees, and closing costs.
Additionally, meet with a lender and get pre-qualified. Although less helpful in the process of getting a mortgage approved, this step will help you immensely in giving you a greater sense of how much your lender will be willing to give towards your new home. Since pre-qualification also requires you to go over your current income, taxes, and debt, it can also be a good personal review to help you make informed decisions about your finances. While you are busy getting pre-qualified, it might also be a good idea to get pre-approved as well, since this process will help streamline the bidding process once you have settled on a property that you would like to purchase.
Finally, go with your gut. Taking all of the above factors into consideration, settle on a final range and attempt to stay within it as much as possible. Find a lender who does not try to pressure you to take out a larger loan than you are comfortable with. This way you can be sure that your perfect home will be one that you not only enjoy waking up in every morning, but also one with the added security of knowing you’ve planned ahead and made the best possible decision for yourself and your family.