Home Loans - 4 Ways To Figure Out How Big Should They Be
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.
So how do you know what's the most you can pay for a house?
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. There's the rule of thumb that says people can afford a house that costs up to 3 times what they earn in one year (before taxes). 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 $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. You're better off considering your house payments as a percentage of your gross income. Banks and other lenders consider that 28% or less for house payments and 41% or less total monthly debt payments are good.
3. To make things better yet, consider that taking 20% out of $25,000 leaves only $20,000 for your other expenses while 50% out of $300,000 leaves $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. For renters, remember to include depending on your situation, you may be able to depreciate your house and deduct the mortgage interest. 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.
Here are the 4 ways of looking at it. You don't have to use only one. 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.
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