Finance Articles

House Mortgage: How Much Can You Afford?

There are several things you need to do to get a pretty fair deal on a mortgage: improving your credit score, cleaning up most of your debt, saving for the down payment, looking for a mortgage broker, shopping for a house, etc. But these are all useless without knowing exactly how much loan you can afford because you cannot get an approval for the amount you need if you simply cannot pay it back to your mortgage company. So if you want to own a dream house, you need to know how much dream you can afford. But mortgage companies do not really care much about you and preference for a house as they care much about your ability to pay back what you borrow from them. And this they have to know by reviewing your credit history, your monthly gross income, and how much money you have for down payment.

Home buying tips.

Careful planning is the secret to a successful home buying. Do your research in advance and monitor the trend of the interest rate. A correct projection of the future rate of interest yields to the right selection of house mortgage. Also, cleaning your debts will definitely help you get a good rate since it improves your credit history, which is one of the bases of the computation of the interest rate. It is also wise to start saving at least a couple of hundred of dollars, several months before you shop for a mortgage loan. This will prepare you to the future financial stress of paying the mortgage off.

What type of mortgage fits your budget?

There are 2 basic types of house mortgage: fixed-rate mortgage and the adjustable rate mortgage. Each has its own characteristic and method of rate computation, which is one of the deciding factors for borrowers to prefer one type of house mortgage over the other. The fixed-rate mortgage offers a relatively higher interest rate over the adjustable rate mortgage. This is because loan has to compensate any losses from a possible future increase of interest rate since the mortgage payment remains the same regardless of the changes in the interest rate in the market.

Meanwhile, fixed-rate mortgage is less affordable than the ARM. In spite of this, fixed-rate loan offers several notable advantages. One, fixed-rate mortgage frees the borrower from worrying about the future increase of interest rate, which in turn, would result to higher mortgage payment and making the mortgage suddenly unaffordable. Two, fixed-rate mortgage can be cheaper if there the interest rate suddenly goes up. And three, fixed-rate mortgage offers a predictable payment plan since the monthly mortgage does not change.

The adjustable rate mortgage on the other hand is more affordable compared to fixed-rate loan for the reason that it offers lower interest rate. Also, borrower can easily qualify for bigger loan since the payment amount and mortgage rate is lower. However, due to the varying interest rate, the mortgage may suddenly become unaffordable the moment interest rate goes up.

To know how much you can afford you need to know 2 things: your front-end ratio and your back-end ratio.

The front end ratio.

In general, your monthly mortgage payment, including homeowners insurance, real estate taxes, principal and mortgage should not exceed to 28% of your gross monthly income. Use this formula: annual salary x 0.28 / 12 (for months). So if you earn $30,000 a year multiply with 0.28, divide it by 12, your front end ratio is equal to $700. In short, you can afford a loan with a monthly payment of $700.

Back-end ratio The back-end ratio is the total debt-to-income which should not exceed to 36%. It is your total debt including all your mortgage, debt obligations, child support, car loan, credit card bills, child loans, etc. The allowable debt-to-income ratio is annual salary x 0.36 / 12 (for months). So, from your $30,000 annual income, your allowable debt-to-income ratio is $900. Meaning, if your monthly mortgage payment is already $700, your other debts should not exceed to $200.

Calculator.

Knowing exactly how much you can afford will require you to use mortgage calculator. There are free and easy-to-use calculations online where you will get the exact figure you need.

For more information on mortgage and home financing please go to: http://www.homefinancingalert.com/Delaware-Financing-Home.html http://www.homefinancingalert.com http://www.drnathaliefiset.com

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