Very few people can afford to purchase real estate using only their personal savings. Most need to take out a mortgage or home loan to purchase a home. While getting a mortgage is neither easy nor cheap, putting it towards buying a home makes it a worthwhile investment. For one thing, you will you own your very own home. Secondly, real estate almost always appreciates in value. If you’re considering getting a mortgage towards a home, the first thing you need to determine is how much can you afford on a mortgage.
What Do We Mean By â€˜How Much Can You Afford on A Mortgage’?
A mortgage is a type of home loan. You are essentially borrowing money from a lender to buy property. This money must be repaid to the lender in regular monthly installments. The monthly payment amount depends on the amount you’ve borrowed and the loan term. By the time you’ve cleared the debt, you will have paid much more than what you borrowed because of the accrued interest over the life of the mortgage.
The mortgage lender determines the maximum amount they will lend you based on your income, debt, assets, and your credit score. However tempting it may be, you should never rush into borrowing as much as the lender will willing to lend you. Instead, you should only borrow as much as much as you can afford to.
How To Determine How Much You Can Afford on A Mortgage
The amount of mortgage you can afford will depend on a number of factors, primarily, your income, monthly debt payments and other recurring financial commitments, and your financial goals.
How much you can afford to put toward a down payment also plays a role in determining how much mortgage you can afford. Down payment is the amount you can afford to pay out of pocket towards the home. Lenders require homeowners to make a down payment of at least 20% of the home’s purchase price, although some may agree to a smaller percentage. The more you can put towards the down-payment the less you’ll need to borrow.
As a general rule, most prospective homeowners can afford a mortgage of about 2 times to 2 ½ times their gross annual income. Gross income refers to your total income from all sources before deducting taxes and other recurring financial obligations.
Using this formula, if your gross annual income is $150,000, you could afford a mortgage of about $300,000 to $375,000. Keep in mind that this is only a recommendation. Depending on your debt repayments and other financial obligations, you may be able to afford a higher or lower mortgage.
Once you’ve determined how much you can afford on a mortgage, use a mortgage calculator to estimate your monthly mortgage payment at different loan terms. This will help you determine which mortgage loan term length works best for you.
Not ready for a mortgage? Check out why a personal loan might be right for you.