First Things First
Before embarking on the journey to homeownership, it is essential that you take a good, honest look at your personal finances. Undertaking a full accounting of your budgetary situation will allow you to start thinking about your possibilities. This will guide you towards sensible options which are in your budget, while conversely preventing you from chasing unrealistic listings, leading to wasted efforts and heartbreak down the road.
Use the TipRanks’ mortgage calculator to experiment with different down payments, loan tenures, and interest rates to get a sense of what your monthly mortgage payments might resemble. This tool can help you understand the push-and-pull of the different variables, how changing each factor impacts the overall shape of your future mortgage, and ultimately, what you will be able to afford.
More Than a Mortgage
Another advantage of using the TipRanks’ mortgage calculator is that it will help you familiarize yourself with the various components of your monthly payments, which extend beyond the mortgage principal and interest.
For instance, if you live in a condo or a neighborhood with a homeowners association, you can expect to pay monthly fees. These expenses will be used by the homeowners association to take care of common areas (such as lobbies, lawns, or pools) and other shared costs (including salaries for a concierge or other janitorial services).
Property taxes are another part of the equation. These are based on the value of the property, and vary by state and jurisdiction. In some cases these will be part of your monthly mortgage payments, which your lender will automatically pay via an escrow account. If your property taxes are not part of your monthly mortgage payments, you will pay your local tax authority directly. This is commonly done via two bi-annual payments, though some individuals will elect to pay these on an annual, quarterly, or monthly basis.
Though much smaller than the selling price of a house, these expenses can add up. Make sure you have the wherewithal to cover these additional costs.
Debt-to-Income Ratio
It’s also important to understand your debt-to-income ratio, also known as a DTI ratio. This represents the amount you pay monthly to service your debts compared to the amount you are earning on a monthly basis.
A good rule of thumb is to consider the 28/36 rule, which a number of lenders use to determine if they will be able to offer you a mortgage. Under this rule, no more than 28% of your monthly income should be devoted towards your mortgage payments. As such, no more than 36% of your monthly earnings should be used to pay down your total debts. A low DTI ratio gives lenders the confidence that you will be able to repay your debts on time and in full. On the other hand, a higher DTI ratio can be a red flag for lenders that you have taken on too much debt, and lowers your odds of receiving a mortgage.
Consider All Your Options
Not happy with your current results from the TipRanks’ mortgage calculator? Don’t despair. There are plenty of steps you can take to try and improve your odds further.
- Try to decrease your expenses: Taking a full accounting of your financial standing will give you a clear picture of your expenses. Seeing the numbers in black-and-white can often help lead to some realizations, and perhaps you will discover that there are certain recurring expenses that you can do without. Cancelling the subscription to that magazine you never read, selling the car you rarely drive, and finding alternatives to the seven (!) pizzas you ordered last month are all opportunities to decrease your costs, improving your DTI ratio (and maybe even your health).
- Experiment with different loan tenures: Entering different loan tenures into the TipRanks’ mortgage calculator will help you understand both the overall cost of the loan and the monthly payments that you will owe. While it is true that the longer timeframes increase the overall cost, extending the loan will also lessen the monthly payments. Consider starting with a long-term mortgage, even if you do not anticipate living in the house for the life of the loan. You can also look to refinance down the line if your situation changes.
- Get bids from multiple lenders: Lenders want your business; it is how they make money. Try a few different ones to see if any of them are able to offer you more preferable terms. You might find that one of your financing options will ease your pathway towards homeownership.
Conclusion
There are many factors that create the constellation upon which your homebuying purchase is based. First and foremost is the state of your finances, which will determine your possibilities. Do not neglect to account for the additional costs incumbent in owning a home, while making sure to consider ways to trim your existing budget, decrease the amount of future monthly mortgage payments, and increase your potential lending options.
At the end of the day, the amount you will be able to afford on the purchase of a house is dependent on how much you have been able to save, coupled with your expected future income. Use the TipRanks mortgage calculator to better understand how these two variables interact and influence the terms of your mortgage, and ultimately how much house you will be able to purchase.
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