 The
first thing people usually want to know when they decide to
go house hunting is "How much house can I afford?" Sometimes
your view of what you can afford is quite different from the
mortgage company's view of what can afford!
Before you fall in love with a dream house that is out of
reach according to mortgage loan guidelines, take a few
minutes to do some calculating.
The result of the process we will step you through is
simply an estimate. The amount calculated should be used as
a guideline. It is important to remember that only your loan
officer can give you a true loan qualification amount.
Qualification details including amount down, loan term, loan
type, differ by loan program so be sure to talk to your loan
officer as soon as possible in the house hunting process.
Following the steps below will result in a calculation of
two sets of figures. These represent the low and high
extremes of the mortgage amount you may qualify for.
- Take your total monthly income from all sources and
multiply it by .28 and also .40. (These are the low and
high extremes that in fact are percentage of your income.
You should use both numbers)
- Subtract your monthly debts. (This should include all
personal debts including credit cards, car payments and
child support.) This will give you the amount of your
income that you have left for your monthly house payment.
- Find out what your property tax and insurance will
equal if paid in twelve monthly installments. Subtract
this from the total arrived at in #2. (You may get these
figures from an insurance agent and the local government
offices where you are thinking about purchasing a home.)
This will leave you a net mortgage amount that you can
afford. (Principal and Interest).
- Multiply this amount by 12 months. This will give you
your annual mortgage payment.
- Divide this amount by the current average interest
rate. You may find this out from your local lender. For
example: if the rate is 7 1/4%, you would use .0725. The
result of this final step will give you the amount of a
mortgage that you are likely to qualify for.
- Now add the amount that you have saved for a down
payment and this will give you the approximate price of a
house that you can afford.
Low HighMonthly Income Monthly Income
Step 1 X .28 X .40Subtotal 1 Subtotal 1
Step 2 - Monthly Debt - Monthly DebtSubtotal 2 Subtotal 2
Step 3 + Monthly Taxes + Monthly Taxes+ Monthly Insurance
+ Monthly InsuranceSubtotal 3 Subtotal 3
Step 4 X 12 X 12Subtotal 4 Subtotal 4
Step 5 ÷ Interest Rate ÷ Interest RateSubtotal 5 Subtotal
5
Step 6 + Down Payment + Down PaymentLow Home Price High
Home Price
Step 7 Contact your REALTOR® and have fun finding your
new home.
Don't forget to visit a lending institution to get actual
qualification numbers. Your REALTOR® will be happy to
provide a referral to a lending institution should you
desire one. A valid pre-qualification certificate from the
lender is an advantage to you when you find the right
property and are prepared to make an offer. Sellers like to
know that the deal won't through for lack of financing!
Should You Refinance Now?
If you aren't in the market for a new home, refinancing
your current home may be a viable option. The most common
rule of thumb used to determine the feasibility is: there
should be at least a two-percent spread between the old
interest and the new rate. The reasoning behind this is that
the difference in interest rates will justify the expenses
incurred when refinancing.
The fact is that refinancing should be done whenever
there is a significant monthly savings and you plan to live
in the home long enough to recapture the costs of
refinancing.
Please remember that points paid on a refinance are not
fully deductible as interest in the year paid. Most tax
experts will tell you to get a par value loan when you
refinance your home. This will keep your out-of-pocket cash
to a minimum. Even though your interest rate may be a little
higher when you don't pay "points", in most cases it is
fully deductible. For impartial advice about whether to
refinance or not, give your REALTOR® a call. Professional
real estate advice can help you make the right decision.
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