How to figure what you can afford in a monthly mortgage payment........
Just because a lender is willing to lend you the world doesn't mean you should take it. Know what you can manage. Don't over-extend yourself.
- Gather and tally your fixed monthly expenses (utilities, credit cards, cell phone, groceries, etc) and subtract that amount from your monthly income. This is roughly what you have left for a mortgage payment.
- Calculate your debt-to-income ratio -- your amount of monthly bills compared to your average monthly income. Mortgage lenders look at this ratio when qualifying you for a loan. If your debt is more than 20 percent of your net monthly income, pay down some bills.
- Understand what a mortgage payment covers. Just remember PITI: principal, interest, taxes and insurance.
- If your down payment is less than 20 percent of the total loan, you may also need to pay for private morgage insurance or what some call PMI.
- Examine your spending habits and try to stretch your monthly mortgage amount by cutting back on non-fixed expenses like entertainment and eating out. You should also build in a buffer in case you lose your job or unexpected expenses arise.
- Consider these rules of thumb about how much house to buy:
- The purchase price should be no more than 2.5 times your gross annual income.
- Your mortgage payment should be less than 28 percent of your gross monthly income.