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How much mortgage can you afford


In this economy, if you have good credit, a steady job, and several thousand dollars for a down payment, you'll likely find a financial institution willing to lend you money for a mortgage. Simply fill in the blanks in an online mortgage affordability calculator to get a ballpark estimate of how much you may be able to borrow.


But online calculators don't tell the whole story. That's why you need to dig deeper. Scrutinize all the factors that could influence your home buying decision, some of which may be hard to quantify. Above all, don't sign a long-term mortgage contract until you've asked and answered the following two questions.


Should I save for a larger down payment?

You may find a house that sells for $200,000 and a lender who will let you make a 10 percent down payment. Under that scenario, you would owe $180,000 initially (disregarding closing costs and other fees). But let's say you choose to wait and save enough cash to make a 20 percent down payment on the same home. Your initial mortgage balance would be $160,000. Comparing these two scenarios and assuming an annual interest rate of 4 percent on a 30-year mortgage, a larger down payment would mean a smaller principal and interest payment each month (about $95 less). In addition, you'd save over $14,000 in interest over the term of the loan and could avoid paying for private mortgage insurance (PMI), which is usually required for borrowers who cannot put 20 percent down. PMI fees vary from around 0.3 percent to about 1.5 percent of the original loan amount per year.


What percentage of my take home pay will be locked into house payments?

Remember, you'll be making mortgage payments every month for years. With that in mind, try to limit your house payment (including taxes and insurance) to 25 percent of your take-home pay. Homes are expensive to maintain. You'll need cash to cover utilities, maintenance, and repairs. Many Americans fall into the trap of being house rich and cash poor. They resort to credit cards and personal loans for all sorts of ongoing expenses: food, transportation, insurance, health care, and emergencies. Don't make that mistake. Build room in your budget for house payments and the routine costs of living.




   
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