By knowing how much mortgage you can handle, you can ensure that home ownership will fit in your budget.
1. The general rule of mortgage affordability
Â 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.
Â 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.
Â 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.
Â The lower your down payment, the higher the loan amount youâ€™ll need to qualify for andÂ the higher your monthly mortgage payment.
Â Lenders generally
follow the 28/41 rule. Your monthly mortgage payments covering your
home loan principal, interest, taxes, and insurance shouldnâ€™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,Â and credit cards, shouldnâ€™t exceed 41% of your
gross annual income.
Â Hereâ€™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 donâ€™t top 41%, or $3,416 in our example.
Â The tax benefits
of home ownership generally allow you to afford a mortgage
paymentâ€”including taxes and insuranceâ€”of about one-third more
than your current rent payment without changing your lifestyle.Â So
you can multiply your current rent by 1.33 to arrive at a rough
estimate of a mortgage payment.
Â Hereâ€™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.
Â However, if youâ€™re struggling to keep up with your rent, consider what amount would be comfortable and use that for the calculation instead.
Â Also consider whether or not youâ€™ll itemize your deductions. If you take the standard deduction, you canâ€™t also deduct mortgage interest payments. Talking to a tax adviser, or using a tax software program to do a â€œwhat ifâ€ tax return, can help you see your tax situation more clearly.
By: G. M. Filisko
Published: March 11, 2010
If you would like information about buying or selling property in Las VegasÂ I can be reachedÂ at:
Kenneth LeBeau - RealtorÂ®
Visit HouseLogic.com for more articles like this. Reprinted from HouseLogic.com with permission of the NATIONAL ASSOCIATION OF REALTORSÂ®.