Calculating how much you can afford on a home mortgage is a lot more complex than calculating how much you can afford in rent. In the latter case, a third of your income is usually a good measure for the most you want to pay in rent. Where a mortgage is concerned, you have to take some other considerations into account when you’re shopping around for houses.
The amount you pay to finance the cost of the house is only the first part of determining how much the mortgage will actually cost you. You’ll also have to take into account the cost of property taxes in the area where you’re buying. Because this is an unavoidable expense, you have to factor it in from the start. If you don’t, you’ll almost certainly underestimate the costs you’ll pay each month.
Take the yearly taxes on the property and add a 12th of that sum to your monthly payments as most people pay this monthly via their escrow account. That way you avoid paying a large sum at one time each year to satisfy your property tax bill.
Homeowners, Flood & Mortgage Insurance
Homeowner’s insurance will be a necessity, as well. You’ll have to factor this into the cost of your home every month. Remember not to go by an average in this case. The homeowner’s insurance could be much more expensive if you live in an area that’s prone to flooding or to fires. This could vary by the neighborhood, so be sure that you’re making a good estimate of what you’ll have to pay.
Unless you show up with a very large down payment, you’ll also need mortgage insurance. This protects the lender from taking all of the risk if you should happen to default on the loan. You’ll have to factor this into the total cost of the mortgage, as well. Make sure your mortgage loan officer can explain this to you and make sure you understand the amount you’ll have to pay.
Debt to Income Ratios
Generally speaking, your mortgage should cost you somewhere between 28 and 33% of your gross monthly income. This cost has to include all the aforementioned expenses, as well as any others that may exist, such as neighborhood association fees and so forth.
The mortgage loan officers at NOLA Lending will be able to help you find a suitable loan that fits your income. One of the things that caused the housing crises was people buying way more than they could realistically afford. If you make smart decisions and buy within your means, a mortgage can be an affordable form of financing that offers you a lot of joy for the amount you pay every month.
Please contact us to assist you in calculating your estimated monthly payments!