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If you are planning to buy a house, the first thought that strikes you is affordability. It doesn’t make sense shopping for a house without knowing how much cash you can shell out each month for your mortgage payment. So, the first thing you need to do is locate a good website that offers free home affordability calculators such as MortgageFit.com, where you can find a number of helpful calculators. If you are aware of your financial strengths and weaknesses, it becomes easier for you to plan out your payments well in advance.
What are the magic numbers?
In order to use the home affordability calculator, you need to feed in the following information
- Gross monthly income
- Annual property taxes (typically 1-2%)
- Mortgage Term (typically 30 or 15 years)
- Mortgage interest rate (currently about 5%)
- Amount you will be paying as down payment
- Other monthly debt obligations (auto loans, credit cards, student loans, etc.)
- Annual homeowners’ insurance premium
The home affordability calculator works on the basis of a 36% DTI or Debt-to-income ratio. This would be all of your debt payments divided by your gross income on a monthly basis. However, if you are comfortable in making a higher payment each month, you may opt for a higher ratio or conversely if you want to live below your means, a lower ratio. Typically, higher ratios are seen in expensive locations such as California and New York City where it would be tough to meet the standard ratios. Also, higher income families sometimes have a higher ratio since they can still easily live off of the balance of their income after the mortgage payments.
It is important that you remain current with your mortgage payments every month. If you fall behind on payments, there are serious consequences. First, lenders typically charge a hefty late payment of 5 percent on average, if you fail to make your payment within 15 days of the due date. After 30 days, the late payment will be reflected on your credit report pushing down your FICO score. Fail to pay your mortgage for a few months after that and you lender can start foreclosure proceedings in most states. Your dream of owning a home will turn into a nightmare as you go through the foreclosure process. So, it is important that you understand the seriousness of the amount you intend to borrow. If you have any doubts, opt for a cheaper house that you know you can make the payments on. So pay attention to the home affordability calculator and make sure its truly affordable for you before you buy.
Contributed by MortgageFit Community member
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