How much house can you afford?
Lenders typically don't want your home debt-to-income ratio
to exceed 28 percent. To determine your DTI ratio, divide your monthly mortgage payment, including taxes and insurance
, by your gross monthly income. Multiply the result by 100. For example, if your housing expenses will be $2,000 and your monthly household income before withheld taxes is $7,000, your DTI ratio would be about 28.6 percent (2,000 -:- 7,000 x 100 = 28.57 percent).
Before doing business with you, lenders also consider your other monthly debt obligations along with your projected housing expenses. For example, if your monthly expenses include $300 for a car loan, $75 in student loan payments and $125 in credit card bills, you would add these to your $2,000 housing expenses for a total of $2,500. Divide that figure by your $7,000 gross income to arrive at a 35.7 percent ratio. Lenders prefer this so-called "back-end" debt-to-income ratio to be 36 percent or less.
Generally, the smaller your monthly mortgage expense relative to your income, the easier it will be for you to keep up with your payments.
Keep in mind that your monthly payment will increase over the years since taxes
and home insurance
costs tend to go up rather than down. Financial institutions keep an escrow account
to track these and other related costs, such as private mortgage insurance
. Lenders provide borrowers with an analysis of the escrow account on an annual basis, showing any projected shortfalls or excess funds for the coming year.
Remember, while lenders can provide you with options for financing a home, they don't have a full picture of your financial life. When considering how much house you can afford
, it's important to take into consideration all of your current expenses, upcoming expenses and how you manage your money. It’s not a great idea to borrow the maximum the lender will approve you for. By living below your means, you’ll be able to set aside money for life’s other goals, like retirement and education expenses.
Cut your loan costs by prepaying principal
This PITI calculator offers another feature that can help you cut your loan costs. See how adding additional principal payments can shorten the life of the loan by years. Determine if you could add to your payment on a monthly or yearly basis, or even just one time. Hit "view results" to see a side-by-side comparison of your regular payment schedule versus the prepayment payment schedule.
This mortgage calculator with taxes and insurance will show you just how much you'll be paying in interest for the life of the loan under both scenarios, as well as how much you can save by making extra principal payments along the way.