How Much Can You Borrow while Buying a Home?
Who wouldn’t want to own a property that can be called home? Unfortunately, there are lots of factors to consider such as mortgage – for a fair deal, you need to have a good credit score, be more or less debt free, save cash for down payment, and so on. Keep in mind that mortgage companies will always verify if you have the ability to pay back what you are borrowing from them.
That is why you should be 100% sure about how much you can afford to borrow when it comes to your dream house. This is decided by:
Front-end ratio
Your monthly mortgage payment consisting of homeowners insurance, real estate taxes, principal and mortgage, should not go higher than 28% of your monthly income. The formula used for computing = annual salary x 0.28 / 12 (for months).
Back-end ratio
This is the total debt-to-income ratio that should not increase 36%. It includes the total debt that comprises mortgage, debt obligations, child support, car loan, credit card bills, child loans, etc. The formula for this ratio = annual salary x 0.36 / 12 (for months).
For a more neutral perspective, you can try an interactive calculator as well.
What type of mortgage suits you?
There are two kinds of mortgages for houses – fixed-rate and adjustable rate mortgage. The former has a higher rate of interest because the loan needs to cover any losses if there is an increase in the interest rate in future, when the mortgage payment remains the same. There is a pro and con in the mechanism of fixed rate mortgage – the borrower doesn’t need to be bothered if the interest rates shoots up in the coming months, but the mortgage payment amount will currently be higher, which makes it slightly unaffordable for everyone. However, the sum remains fixed, so you can plan your finances better.
The adjustable rate mortgage is cheaper as compared to a fixed-rate loan because of the low interest rate. On the plus side, the borrower can apply for a bigger loan since the mortgage rate and payment is much lower. But there is a risk of the monthly payments going up if the interest rate suddenly increases.
Purchasing a home requires a lot of thought and planning. Start your research well in advance and check the trends of interest rates, so you have a pulse on which way it is likely to sway. Before shopping for a mortgage loan, try and save as much as you can so you are financially prepared.
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