How Much Mortgage Can I Afford in 2021?
You’re ready to settle down and buy a home. Exciting, right? While it’s easy to get swept up in the dreamy online real estate listings, you’re also probably asking yourself, “How much mortgage can I afford?” Yes, as much as it’s fun to picture yourself waking up in that four-story Victorian on the hill, it’s vital to practically understand the limits of your budget. And it’s not always a straightforward answer, especially when it comes to mortgage payments. Several factors come into play to answer this question. But, don’t worry, because we’re here to break it down for you.
Factors That Determine Your Mortgage Affordability
To determine how much mortgage I can afford, there are a few essential details to consider, from your household income and monthly debts to the amount set aside for a down payment. You’ll want to have a clear understanding of all these factors to feel confident going into the home buying process.
It always starts with the basics. Before you consider taking out a mortgage, you should know the following numbers:
- Your yearly gross household income
- How much you have saved up to make a downpayment
- Your credit score
This will be vital information for any mortgage lender and help you start answering that question: how much mortgage can I afford?
While household income and credit scores are pretty self-explanatory, knowing how the down payment affects your home affordability deserves a more thorough explanation. Why? Well, how much you put down will ultimately determine the loan amount and, therefore, your monthly mortgage payment. You could put down the traditional 20% of the purchase price or as little as 3% with a conventional loan, which Fannie Mae or Freddie Mac backs.
Let’s look at an example. A $750,000 house with a 2.70% interest rate on a 30-year fixed-rate mortgage with a 20% down payment would cost about $2,400 a month. The same home with 3% down would make the monthly payment roughly $3,500 because the loan amount will be higher, and you would need to pay for mortgage insurance.
The basic information reveals how much money is flowing into the household. The next step is to figure out how much is being spent. Comparing your monthly pre-tax income to your total monthly debts will create a metric for the mortgage lender known as a debt-to-income ratio (DTI). Those debts could include:
- Credit card payments
- Monthly alimony or child support payments
- Student loan payments
- Car payments
- Any other monthly payments
Typically, housing expenses shouldn’t exceed 28% of your monthly income. But, your credit score could qualify you for a higher ratio. That’s why it’s important to have that number available in the basic information step of the process.
To answer how much mortgage can I afford, you need to think beyond income and debts. It’s vital to consider your lifestyle. How much do you actually spend on groceries? Could you live without the gym or Netflix? Add up your total personal lifestyle expenses from utilities and pet costs to entertainment and transportation costs. This will allow you to see what you can truly afford without sacrificing happiness.
Other Mortgage Factors To Consider
Your DTI and lifestyle preferences will give you a solid foundation to know how much mortgage you can afford. You could plug those numbers into a home affordability calculator and learn conservative, average, and aggressive home prices. But that number can be tweaked depending on a few additional factors.
The Mortgage Term
Like the down payment amount, the mortgage terms will affect the answer to how much mortgage can I afford. Mortgage term means the length of time you have to pay back the amount you’ve borrowed. Those terms–which are typically 15 and 30 years–will affect your monthly payment. So, let’s take that $750,000 house again. With a 20% down payment and 2.70% interest rate, you would pay around $2,400 with a 30-year fixed-rate mortgage. That same house, downpayment, and interest rate with a 15-year fixed-rate mortgage would make that payment around $4,000 a month.
An interest rate is what it costs you every month to finance your property. These rates are determined by a combination of factors, including the current economic market and the personal information discussed above. A mortgage lender will be the one to ultimately provide you the rate, which is why it’s essential to shop around to get the best rate. For example, that $750,000 house with a 2.7% interest rate would mean a $2,400 monthly payment. Bump that rate to 4.25%, and the payment becomes roughly $2,900. That’s $500 more a month you have to budget for, not to mention you’re paying $180,000 more over the life of the loan with the higher rate.
Taxes, Insurance, and Closing Costs
Other costs you should consider when answering “how much mortgage I can afford” that many people fail to remember are homeowners insurance, taxes, and closing costs. Here’s how each one works:
- Homeowners Insurance: The amount of your homeowners’ insurance is determined by where you live and the type of home you buy. The value of your property, potential renovation costs, and the value of your at-risk assets are all considered. Good lenders will roughly calculate this cost for you during the mortgage approval process.
- Property Taxes: Your property taxes are figured out by multiplying your property’s assessed value by the local tax rate. Some cities (even ones next to each other) could have drastically different rates, which would contribute to your total monthly costs.
- Closing Costs: So, you’ve got just enough for that 20% down payment. But, you’ll also have to cough up another 3% to 6% of the home purchase to cover closing costs like loan origination, appraisal, and title search fee. This could change the amount you have for a down payment, which ultimately affects your monthly payment.
Again, a reputable lender should help calculate these costs for you.
Calculating How Much Mortgage Can I Afford?
All of these factors and numbers are understandably daunting. Using a free online tool like our affordability calculator simplifies the process. It will prompt you to enter that basic information, monthly debts, and lifestyle expenses. Then it will roughly determine the house you can afford. Dream home, here you come!
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