As potential homebuyers, your first step in the home buying process is to ensure that you will be able to afford a mortgage. An easy way to do this is to talk to a mortgage lender. They are able to pre-approve you for a mortgage, thus letting you know how much house you can afford.
However, this isn’t the only way to understand what you can afford. There are some simple calculations that you can perform on your own to get a feel for what type of mortgage amount you can support as homebuyers.
One way to determine how much of a mortgage you can afford is to look at how much the monthly payments would be. There are many mortgage calculators online that will help you run the numbers.
All you will need to do is enter the mortgage amount, down payment, terms of loan (30-year fixed, 20-year, etc.) and interest rate and the calculator will do the rest. There are even many online calculators available that will input the average mortgage rate in your area if you do not know what your interest rate will be.
You will then have results to help you decide if you can afford the mortgage.
If you are trying to purchase a house for $200,000 with a 10% down payment and a fixed rate 30-year mortgage at 4.190%, you will pay $879 for your mortgage and interest. Many of these calculators will even give you an example of what your total responsibility will be including insurance and taxes.
It is important when calculating the monthly payment that you have accurate information. A payment that includes insurance and tax will change based on the location that you are buying in. The type of loan you have will also influence the amount of your payment. For example, a 15-year mortgage payment will be much higher than a 30-year fixed mortgage.
Just like mortgage calculators, you can also find home affordability calculators online. These calculators help you look at your income and debt (like student loans, credit cards, and auto loans) to see how much you can afford to pay each month for your mortgage.
While these calculators can be helpful, they do not take into consideration all of the additional expenses that come along with homeownership. Individuals who are used to renting are often surprised by the amount of utilities that they have to pay out of pocket when they buy a house that were previously included with their rent.
Not accounting for these extra expenses can cause money to be tighter than the homeowner had expected.
While these online tools are helpful in giving homebuyers an idea on how much house you can afford and what type of payment you will be required to make, they are not a replacement for talking to a lender.
Just because you think you should be able to get approved for a certain amount does not mean that you will be able to be approved through a lender.
When you are ready to start the process of homeownership or if you have questions, contact a mortgage lender to get started.