|
How Much Home Can I Afford?
A general rule of thumb is your mortgage payment (principal
plus interest) should be about 25 percent of your gross
monthly income. Real estate taxes plus insurance will
add another 3 to 6 percent. Other monthly living expenses
(including food, clothes, auto payments, other loans,
charge cards and utilities) should range between 33
percent to 36 percent of your gross monthly income.
The balance of your income goes for taxes and savings.
It's easy to figure an approximate amount for taxes
and living expenses. The big question is how to figure
out what size mortgage you can afford. Don't forget
you'll need at least a 10% down payment (and maybe 25%)
plus closing costs of 2 to 5% of your mortgage - cash
up front.
The basic formula to calculate your monthly payments is:
(Mortage Amount / $1,000) x Payment from Chart
Equal Monthly Payments to Amortize a Loan (per $1,000 value)
Mortgage Payment Table
Term
Rate % |
15
Years |
30
Years |
| 5 |
$7.91 |
$5.37 |
| 5 - 1/2 |
8.17 |
5.68 |
| 6 |
8.44 |
6.00 |
| 6 - 1/2 |
8.72 |
6.33 |
| 7 |
8.99 |
6.65 |
| 7 - 1/2 |
9.27 |
6.99 |
| 8 |
9.56 |
7.34 |
| 8 - 1/2 |
9.85 |
7.65 |
| 9 |
10.14 |
8.05 |
| 9 - 1/2 |
10.44 |
8.41 |
| 10 |
10.75 |
8.78 |
You have just found
a house for $150,000 and you have a $30,000 down payment
plus the closing costs ($2,400 to $6,000). You have
to mortgage $120,000. Can you afford it?
Using the monthly
payment formula for a 30-year mortgage at 10 percent
interest you have: $120,000 x $8.78 = $1,053.60
$1,000 monthly
payment or $12,643.20 per year. To figure if this
is 25 percent of your gross annual income divide by
.25 which equals $50,572.80. You must earn $50,572
to qualify for this mortgage. This is assuming there
are no kinks in your credit rating.
Mortgage Interest Table
| Rate % |
Total Interest/$1,000 |
| 30 -year |
15-year |
| 5 |
$ 911 |
$ 416 |
| 5 - 1/2 |
1,031 |
466 |
| 6 |
1,151 |
516 |
| 6 - 1/2 |
1,271 |
567 |
| 7 |
1,394 |
618 |
| 7 - 1/2 |
1,517 |
669 |
| 8 |
1,643 |
721 |
| 8 - 1/2 |
1,769 |
773 |
| 9 |
1,898 |
825 |
| 9 - 1/2 |
2,028 |
879 |
| 10 |
2,161 |
935 |
If this turns out
to be good news and you actually can afford a bigger
and more expensive house (room that you don't necessarily
need at this time), you should consider a 15-year
mortgage at 10 percent.
Using the formula
again, your monthly payments on the same mortgage
with the same down payment will be $1,290 per month
(120 x $10.75), but now your annual gross income has
to be approximately $61,920 to qualify.
Your next question
may be "Why should I pay more per month for a 15-year
mortgage?" Examine the interest table.
The interest on
your 30-year mortgage will amount to $2,161 x 120
or $259,320, while the interest on your 15-year mortgage
is $935 x 120 or $112,000. A difference of a whopping
$147,120! Does that answer your question?
Also, something
else to consider is that the equity in your house
accumulates much faster with a 15 year mortgage. You're
now in a more positive situation to move to a more
expensive house, if you wish.
|
