Home Loans - 4 Means Of Determining How Much You Should Borrow?

If you're like a lot of people, you think that banks always look out for themselves and never give anyone more mortgage than they can afford. 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 simple, actually. 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. Then you think about what's likely to happen to you in the immediate and not so immediate future and how much will it cost. Maybe you'll become a parent. Maybe you'll lose your job. Maybe you want to go on a 3-week European vacation once a year.

1. You can start with the rule of thumb that says you can afford to pay 3 times more than what you gross in a year for your home. If your gross earnings are $100,000, by this rule you can afford to pay up to $300,000 for your home. The rule doesn't take into account down payment amounts or mortgage rates, specifically, the mortgage rate you're likely to get. 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 like to see that your house payments are less than 28% of your gross income and your total debts less than 41%.

3. So, to be even better off, keep in mind that if you take 20% of a yearly income of $25,000 to pay for mortgage, property taxes and insurance you're left with only $20,000 for everything else. If you take 50% of a yearly income of $300,000, you're left with $150,000. In other words, 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. For renters, don't forget to include under certain circumstances interest can be deducted and the house can be depreciated. It's best if you ask your accountant about this (because some people can use the interest as a deduction and some cannot - you can't if you don't itemize. It doesn't make sense to itemize if you don't have more itemized deductions than the standard deduction). 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.

About the Author

In order to know how much house you can buy, you need to know the current mortgage rates. Mortgage rates can vary a lot from day to day. You can check here the Chicago mortgage rates. Whether you''re Googling 'Chicago mortgage broker' 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.