How Much House Can You Afford?
Your Monthly Mortgage Payment
Dollars and Sense
If you have very high monthly expenses because of high credit card or other debt, reduce the debt as much as you can before you go to apply for a mortgage. It will work against you on your application.
Say you're earning $40,000 a year. That means, without going above 28 percent of your income, you could pay $11,196 a year for your mortgage, or $933 a month. To keep within the 36 percent limit for total debt payment, you could spend $14,400 a year or $1,200 a month on all of your debts. The following table gives you a better idea of how much you can afford to pay each month. Remember that a mortgage will typically include the principal, interest, real estate taxes, and homeowners insurance. There are additional payments for PMI (Private Mortgage Insurance), mortgage insurance, etc.
| Annual Income* | Annual Mortgage Payment | Monthly Mortgage Payment |
| $ 20,000 | $ 5,600 | $ 466.67 |
| 25,000 | 7,000 | 583.33 |
| 30,000 | 8,400 | 700.00 |
| 35,000 | 9,800 | 816.67 |
| 40,000 | 11,200 | 933.33 |
| 45,000 | 12,600 | 1,050.00 |
| 50,000 | 14,000 | 1,166.67 |
| 55,000 | 15,400 | 1,283.33 |
| 60,000 | 16,800 | 1,400.00 |
| 65,000 | 18,200 | 1,516.67 |
| 70,000 | 19,600 | 1,633.33 |
| 75,000 | 21,000 | 1,750.00 |
| 80,000 | 22,400 | 1,866.67 |
| 85,000 | 23,800 | 1,983.33 |
| 90,000 | 25,200 | 2,100.00 |
| 95,000 | 26,600 | 2,216.67 |
| 100,000 | 28,000 | 2,333.33 |
*Gross Income
Show Me the Money
Lenders often require private mortgage insurance (PMI) to protect them against losing their money if you should default on your loan.
You should have an idea of how high the property taxes, also called real estate taxes, are in the areas in which you're looking at homes. The tax rate can vary greatly, depending on the makeup of the area. For instance, an area that contains affluent businesses and industry will normally offer a lower tax rate for residents, because the industry provides a strong tax base. An area that is almost entirely residential, however, generally has a higher tax rate. The tax rate can make a difference when you're deciding whether you'll be able to afford a particular home.
If you have a mortgage, you're required to have homeowners insurance. If you put down less than 20 percent of the value of the home, you'll need private mortgage insurance (PMI), as well. Lenders often require this type of insurance as protection against borrowers who may default on the loan.
Try to get an idea of what the cost of homeowners insurance runs in the areas in which you're looking at homes. Your insurance agent or a company in the same general area will be able to give you estimates.
More on: Family Finances
Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
To order this book visit the Idiot's Guide web site or call 1-800-253-6476.
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