If you're like most 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.
So, how do you buy a house that doesn't place too much stress on your finances?
It's not difficult. You need to know how much mortgage you can afford. Just keep in mind that banks often qualify you for more than you can afford. 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. Also think ahead. What are you likely to need or want in 2, 5, 10 years? Will you become a parent? Will your daughter be starting college but only if you pay for tuition?
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 you gross $50,000, you can afford to buy a house up to $150,000. 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. 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. 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. Said another way, make sure that whatever is left over does, actually, cover your other needs, regardless of percentages banks allow or don't allow.
4. If you've been paying rent or have a mortgage now, a good way to do things is to look at what happened last month and how you felt about it. If you're a renter, don't forget to calculate under certain circumstances interest can be deducted and the house can be depreciated. Consult with your accountant to figure out if you yourself can do that. Generally speaking, if you get the deduction and depreciation, you can spend about 33% more on house payments (mortgage, property taxes, property insurance) than you did on your rent and end up in the same place financially.
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. Don't let emotions get in the mix. 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.
Author Resource:
To know how much you can buy, you need to know what kind of mortgage rate you're going to get. Mortgage rates can vary a lot from day to day. You can check here the Chicago mortgage rates . Whether you''re Googling 'Chicago mortgage' 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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