The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
How Much Mortgage Can I Afford?
When it comes to big life decisions, buying a home is near the top of the list. If you’re asking yourself, “how much mortgage can I afford?” keep reading to find out how to calculate how much home you can reasonably purchase.
Have you been saving up money and feeling ready to purchase a home? Congrats! The days of rent checks and landlords dictating the colors you can paint your walls may soon be a distant memory. But before you start perusing the color swatches, ask yourself these important questions:
How Much House Can I Afford?
Time is precious — so don’t waste it looking at homes that are out of your price range.
Take your monthly income and subtract all your mortgage-related expenses to decide what would be a comfortable monthly payment. If you’re planning to purchase with a partner, whether it’s your spouse or your sister, make sure you’re crunching numbers with them based on your combined income. A good guideline is to keep your monthly mortgage-related costs (principal, interest, taxes and insurance) at or under 28% of your gross monthly income (total income before taxes are taken out).
To help you figure out your monthly mortgage payment, Desert Financial’s Home Purchase Monthly Payment Calculator can help:
Make sure to also factor in:
- Other homeownership costs such as taxes and insurance
- Utilities and other home-related bills
- Association fees
- Home repair and upkeep expenses
What Amount of Upfront Costs Are Comfortable for Me?
Next, figure out how much money you can contribute toward your down payment on the new home.
Larger vs. smaller down payment
The more money you put down, the less you finance, which means a lower monthly mortgage payment and likely a better interest rate. Larger down payments also lower the loan-to-value ratio (LTV). An LTV ratio is something lenders use to determine how much risk they're taking on with a secured loan.
Putting a smaller amount down may increase your monthly payment, but you’ll also have more money left over for making improvements or building an emergency fund.
If you put down less than 20%, you’ll have to pay private mortgage insurance (PMI). Generally, PMI costs 1% of the total loan value and is factored into your mortgage payment.
No matter your goals, there are many loan programs with varying down payment requirements that fit every budget.
Don’t forget about closing costs
On average, closing costs are about 3-5% of the purchase price of your home. These costs cover important parts of the homebuying process, like home inspections, appraisals and attorney fees.
Which Mortgage Type Fits My Needs?
There are many types of home loans available, as well as options for the length of your loan. Mortgage rate types include:
- Fixed-rate: A fixed-rate loan locks in an interest rate for the loan's entire term. This means your payments will be the same amount over the entire loan term.
- Adjustable-rate: An adjustable-rate loan means the interest rate fluctuates. It may offer you a lower rate initially, but the rate could go up or down during your loan term, depending on the market.
15-year loan vs. 30-year loan
Both loan terms offer pros and cons. See the chart below for the benefits of each loan type.
Who Am I Going to Borrow From?
Next, you need to decide where to borrow the money. Some people opt to get a mortgage with their primary bank or credit union. Others go through mortgage lenders or mortgage brokers.
Direct lenders (banks and credit unions)
Direct lenders like banks and credit unions originate, process and fund the mortgage loan themselves. Unlike most nationwide banks, credit unions like Desert Financial offer additional perks to their members — like the potential for loan discounts and/or money toward your closing costs!1
Mortgage lenders and brokers:
Mortgage lenders only provide real estate loans and no other financial services. They handle the entire process without third parties.
Mortgage brokers are the middleman between the borrower and the lender. Brokers have access to a variety of lenders and loan options, but they don’t have control over the speed of a loan approval like mortgage lenders, banks and credit unions do.
What Do I Need to Get Started?
Getting a pre-approval for your loan can help reduce the stress of purchasing a home by letting you know the loan amount you qualify for with a particular lender. It can also speed up the process of purchasing the home so that you can close quickly. It’s best to complete this step before you start looking at houses, as many sellers only consider offers from buyers that are pre-qualified or pre-approved.
When completing your pre-approval application, be prepared to provide details about your employment, income, debt and financial accounts.
Buying a new home can be a complicated process. By asking yourself these five questions before you choose your perfect place, you’ll set yourself up for a smoother and less stressful time. This way, you can focus on the best part of buying a new place — thinking about all the great memories you’ll make there. Happy house hunting!
1Participation in the Real Estate Broker Program is voluntary. Desert Financial Credit Union and its subsidiary Define Mortgage Solutions LLC do not receive any benefit, monetary or otherwise, from the Participating Broker under this program. Participating Brokers are non-affiliated third parties of Define Mortgage Solutions LLC and Define Mortgage Solutions LLC makes no warranties or representations about the services provided by Participating Brokers. To participate in this program, the member does not have to finance mortgage loan through Define Mortgage Solutions LLC. For full program details, see the Real Estate Broker Program Member Notice Acknowledgement.
Mortgage loans are offered by Define Mortgage Solutions, LLC, NMLS ID #1761612, a subsidiary of Desert Financial Credit Union. BK#0949053