That depends largely on your income. Experts suggest your mortgage payment be no more than 28-35% percent of your monthly income. This income-debt ratio is the percentage of your monthly income dedicated to making your monthly mortgage payment. If you want to maximize your home buying potential, you can assume that more of your income will be tied up in your monthly mortgage payment.
Let’s assume your gross income is a $100,000 a year and you have $20,000 for a down payment. You conservatively elect to spend 28% of your income on monthly mortgage payments. If you take out a 30yr fixed mortgage at 5% interest, you can afford about $393,000 of home (rounded to the nearest thousand).
-$28,000 of your income *30 years= $840,000(rounded)
-The principal of your loan is $372,000(rounded)
-Your amortized interest will be $346,000(rounded)
-The principal plus the interest will be about $719,000(rounded)
-Assume property taxes and insurance that will cost about $4,000 annually: at $4,000* 30 years, add another $120,000.
Interest at 5%: $346,000
Taxes and insurance: $120,000
Total cost = $840,000
All told, your annual income of $100,000 plus your $20,000 down payment can buy you 393,000 of home. If this seems complicated, consult an amortization chart. An amortization chart is a useful tool that will calculate how much interest will cost you across thirty years at a given rate.
Fundamentally speaking, you can calculate home cost by the percentage of your income you are willing to dedicate to a mortgage payment. Again, experts recommend you spend no more than 40%, maximum, of your annual income on mortgage payments. The best place to start is to calculate how much your income you can free up, and then consult a mortgage calculator and/or amortization chart to see what your income can buy.
Regular loans over jumbo loans
Right now, the prime rate on loans is at an historical low. This means that you have more purchasing power so long as you lock in the rate with a fixed-rate mortgage. It is an incredible time to buy if you are in a position to do so financially.
You should be aware that an ultra-low prime rate is typically predicated on taking a home loan below $625,000. These are called “conforming loans” because Freddie Mac and Fannie Mae, the nations two largest publicly trading and federally backed loan securities institutions, will only back loans that ‘conform.’ The average conforming loan is about $417,000. Loans that do not conform are a higher risk for lenders because they are a greater risk, and will come at a greater interest rate.
Improve your credit score
How much home you can afford is predicated, like most things, on how much income you generate and your credit score. An ideal credit score will get you the best interest rate, and save you money over the course of your mortgage. Do small things to help your credit score like paying down old debt, and tidying-up your borrowing habits and history. This will improve your debt-credit ratio, thus improving your credit score.
A loan officer can tell you exactly how much home you can afford to buy. He or she will calculate your financial portfolio to the minutiae, and give you the most accurate estimation of your home-buying power. Loan officers often make use of the same tools used in this blog: mortgage calculators and interest amortization charts. If you still have questions, a real estate agent from GayRealEste.com will help you measure the unforeseen, like projected home values and mortgage interest rates.