Home Loans - 4 Ways To Figure Out How Big Should They Be

If you're like most people, you think that banks always look out for themselves and never give anyone more mortgage than they can afford. Though what you think makes sense, it's not how it actually works. Banks do look out for themselves, don't like to lose money. But what they think it's in their best interest depends on a lot of things. They don't have anything to do with this article. So, just know it happens.

How do you buy a house and feel safe and secure in it from a financial point of view too?

It's simple, actually. You need to figure out how much mortgage you can reapy comfortably. What you can comfortably afford and what your mortgage broker qualifies you for are not always the same. Once you know that, you add the other house payments (heating, water, electricity, landscaping, property taxes, property insurance, reserves) and you have your total house expenses. 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 'paints with a broad brush' as it doesn't take into account how big of a down payment you're making or the interest rate you're getting. A $100,000 mortgage at 5% has monthly payments of $536.82 or $6,441.84 a year. The same $100,000 at 7.5% has monthly payments of $699.21 or $8,390.52. A significant difference.
2. You're better off considering your house payments as a percentage of your gross income. Lenders like to see that your house payments are less than 28% of your gross income and your total debts less than 41%. Of course, they've been known to give people a home loan whose total debt payments (minimums) added up to 55% of their gross income.
3. So, to be even better off, keep in mind that if you take 20% of a yearly income of $25,000 to pay for mortgage, property taxes and insurance you're left with only $20,000 for everything else. If you take 50% of a yearly income of $300,000, you're left with $150,000. In other words, make sure that whatever is left over does, actually, cover your other needs, regardless of percentages banks allow or don't allow.
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. If you're a renter, don't forget to calculate the tax benefits (you don't pay taxes on the interest portion of your monthly payments and you can depreciate your home). It's best if you ask your accountant about this (because some people can use the interest as a deduction and some cannot - you can't if you don't itemize. It doesn't make sense to itemize if you don't have more itemized deductions than the standard deduction). As a rule of thumb, you can pay about 33% more on house expenses than you did on rent.
If your current rent (house expenses) leave you stressed, you obviously should be aiming for something lower.
So, how much house can you afford?

By: Marcus J. R. Peterson

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