Home Loans – 4 Ways To Figure Out How Big Should They Be
If you’re like a lot of people, you probably think that banks don’t give out mortgages borrowers can’t easily reapy. Though what you think makes sense, it’s not how it actually works. Yes, banks look out for themselves but it’s a bit more complicated than that. But that’s not what I’m writing about. What I’m writing about is: How do you know how much home you can afford?
So, how do you buy a house that doesn’t place too much stress on your finances?
Simple. You have to figure out what’s the highest mortgage you can afford. What you can comfortably afford and what your mortgage broker qualifies you for are not always the same. Add that to the total house expenses, making sure you don’t leave anything out. That means alot for all the bills and for reserves. Then you think about what’s likely to happen to you in the immediate and not so immediate future and how much will it cost. Maybe you’ll become a parent. Maybe you’ll lose your job. Maybe you want to go on a 3-week European vacation once a year.
1. Many people say that, as a rule of thumb, you can afford a home that costs up to 3 times what you gross a year. If your gross earnings are $100,000, by this rule you can afford to pay up to $300,000 for your home. The rule doesn’t take into account down payment amounts or mortgage rates, specifically, the mortgage rate you’re likely to get. A $120,000 mortgage at 5% has a monthly payment of $644.19 or $7730.28 yearly payment. The same $120,000 mortgage at 7.5% has a monthly payment of $839.06 or $10,068.72.
2. Another way, a better way, is to add up your mortgage payments and your property taxes and insurance and convert them into a percentage of your gross or net income. Lenders consider that 28% or less for house payments and 41% or less total monthly debt payments are good.
3. So, to be even better off, keep in mind that taking 20% out of $30,000 leaves $24,000 for all your other expenses while taking 40% out of $300,000 leaves you with $240,000 for your other expenses. Said another way, just make sure you’re left with enough for your other expenses, no matter what lenders allow you to borrow.
4. A great way to go about figuring it out is to consider your rent (or previous house expenses) and how you felt covering all your other expenses with whatever was left over. For renters, remember to include under certain circumstances interest can be deducted and the house can be depreciated. You accountant can tell you if you can or not. As a rule of thumb, you can pay about 33% more on house expenses than you did on rent.
If your current rent or house expenses leave you stressed, you obviously should be aiming for something lower.
Now you have 4 ways of looking at it, not mutually exclusive ways, either. Whatever you choose to do, don’t let emotions get in the way of math. Buying a home is all about math. Yes, it’s great if you also love your new home. But you’re not going to love it for a long time if the bank takes it back.
In order to know how much house you can buy, you need to know the current mortgage rates. Mortgage rates can vary a lot from day to day. Check here the Chicago mortgage rates. Whether you”re Googling ‘Chicago mortgages’ or some other term, start your search for a loan source early, long before you plan to close. It takes time to get a good mortgage broker. There might be surprises in your credit reports.
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